How big is a hedge fund salary? In can be astronomical, some of the top hedge fund managers have been known to pull down several billion dollars in a good year. Hedge fund salaries are based on a number of factors, but the most important are performance and size of assets under management.
In most cases, hedge fund managers are primarily compensated by a performance fee. Usually this performance fee is a set percentage of the total profits generated by the fund. Most of the time, the performance fee is set to 20% of the fund’s profits. So to get a high salary a fund manager has to generate a lot of profits. Higher profits result in higher pay.
The Two Levers
The size of the profits depends on two factors the percentage return on the fund’s assets and the size of the funds assets. A fund manager can generate large absolute profits in by pulling two levers.
The first lever is to generate a high percentage return. If they have $100M in assets and they generate a 100% return, they will generate $100M in profits and they will get to keep 20% of the profits or $20M.
The second lever is to have a high level of assets under management. If the manager has $1B in assets, but only generates a 10% return, they still make $100M in profits and will get to keep 20% of their winnings or $20M. So their salary is the same, but the route they traveled to obtain it differed.
So what is the secret to a billion dollar hedge fund salary?
Well there are two secrets. First, have the highest possible assets under management. Bridgewater is one of the biggest hedge fund and it is approaching $100B under management. Second generate the highest possible percentage returns. In the midst of the subprime bubble Ladhe Capital generated percentage returns approaching 700% annualized.
I know that this is a bit hyperbolic, but put the two factors together $100B in AUM and 700% returns and you get a huge profit of $700B, take 20% of that and you end up with an enormous (and purely unrealistic) payday of $140B.
Is this possible? Probably not, because as the size of assets under management grows it becomes harder and harder to generate high returns. But it is still fun to image that you could be the person to do this.