A hedge fund manager's compensation structure is twofold; and includes investment earnings as well as fees charged to investors. Typically, fund managers assign a 2 percent fee for managing assets and a 20 percent fee for performance to investors. When a fund's investment performance falters, it hurts investor profits and fund-manager compensation. It is common for a hedge fund manager to also have his own money invested in a hedge fund.
A hedge fund manager's compensation is directly linked to the investment performance in a fund. Higher investment returns lead to more lucrative income that fund managers can earn from investors. In 2009, fund manager David Tepper earned $4 billion in compensation, according to an article in "The New York Times" titled "Pay Of Hedge Fund Managers Roared Back Last Year." He was among the top earners that year, and outperformed other hedge funds largely because of a risky but successful strategy for investing in financial stocks even amid uncertainty in the sector.
In 2008, when the size of the hedge fund industry shrunk dramatically, fund manager compensation suffered. The majority of hedge funds generated investment losses that year, according to an article in "The New York Times" titled "Top Hedge Fund Managers Do Well In A Down Year." Only a handful of top select hedge funds managed to outperform the markets and compensation for even the best-performing managers was below normal.
High Water Mark
A high water mark is an element in a hedge fund compensation structure. It is designed to protect investors from paying unfair fees. Hedge funds are meant to beat the performance in the rest of the financial markets. If a hedge fund's investment performance declines, clients cannot be assessed any performance fees until after any losses are regained. A hedge fund manager is tasked with constantly improving the value of the fund to earn the lofty performance fees, according to the Eureka Hedge website.
A hedge fund's fee structure, which affects a manager's compensation, can be negotiable. Pension funds facing funding shortfalls have been successful at securing lower fees, according to a 2011 article on Bloomberg.com. New Jersey's state pension was positioned to save approximately $40 million over a five-year period amid successful fee reduction negotiations that unfolded with private fund managers, including hedge funds. The pension also sought to lift its scheduled investments into private funds by 10 percent.
- "The New York Times"; Pay Of Hedge Fund Managers Roared Back Last Year; Nelson D. Schwartz, et al; March 2010
- "The New York Times"; Top Hedge Fund Managers Do Well In A Down Year; Louise Story; March 2009
- EurekaHedge: Hedge Fund Databases
- Bloomberg; California, New Jersey Pensions Squeeze Fee Savings; James Nash, et al; February 2011
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