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By Lawrence Delevingne
NEW YORK Nov 21 Hedge funds have struggled of
late to keep up their reputation as the sports cars of the
investment world, often overtaken in the race for returns by the
public buses of portfolios, index funds.
But the proverbial Ferraris of investing - paid big to beat
the market or protect from its gyrations - have so far shown
little sign of curtailing their lavish spending on compensation,
offices and employee perks.
Hedge fund operators still work out of trophy offices in
Manhattan's Plaza district, Greenwich, Connecticut or London's
Mayfair. They are keeping the free lunch and snacks, ski and
beach junkets, and even in-house yoga. And they continue to
lavish portfolio managers with multi-million dollar pay, all in
the face of poor performance and declining fees.
"These guys aren't living in reality," said Brad Balter,
chief executive of Boston-based hedge fund investor Balter
A critic of the industry's extravagant ways and a longtime
proponent of lower-cost mutual fund-like hedge funds, or liquid
alternatives, Balter said many high-spending hedge funds will
eventually have to change their ways and become more like their
more humble mutual fund cousins in terms of compensation, perks
and other costs.
But there are few signs of dramatic change.
Many hedge funds have underperformed the equities market
this year, with stock-pickers burned by losing bets on Valeant
Pharmaceuticals, Allergan and Home Depot
, among others, while macroeconomic managers have
struggled to trade their way through global political and
But the average portfolio manager at a firm running more
than $4 billion with middling-performance - up about 1 percent
year-to-date - is expected to make an average of $2.23 million
That is up from $2.21 million in 2015 and down from $2.42
million in 2014, according to 2017 Glocap Hedge Fund
Top executives stand to make far more. The average wealth
gain for the highest earning 25 hedge fund managers in 2015 was
$517.6 million, according to a ranking by industry publication
Alpha. Five firm founders - Ken Griffin, James Simons, Ray
Dalio, David Tepper and Israel Englander - made at least $1
By comparison, the average mutual fund portfolio manager,
regardless of size or performance, is expected to make $634,000
in 2016, according to Glocap, up from $630,000 in 2015.
"Even if performance is down, managers still understand the
need to pay big for top talent to avoid losing the very people
who will help them generate returns," said Peter Friedman, chief
executive of Integra Advisors, a recruitment firm that focuses
on quantitative investing.
There are some small signs of a reckoning. Poor recent
performance of late and predictions by McKinsey & Co and others
of tepid returns for years to come - because of low interest
rates, slow economic growth and more - have caused a small but
high-profile group of clients to revolt.
Investors have pulled some $51 billion out of the
approximately $3 trillion hedge fund industry over the first
three quarters of 2016, according to data tracker HFR, on pace
for the biggest drop since the financial crisis of 2008 and its
For those staying put, clients are demanding steep
reductions to the classic fee model of 2 percent of assets and
20 percent of investment gains. A handful of major firms have
acquiesced, including Brevan Howard Asset Management, Caxton
Associates and Och-Ziff Capital Management Group.
Many new managers are launching their firms with fees closer
to 1.5 percent of assets and 15 percent of gains, including
so-called "hurdles" that prevent charging for performance before
beating a benchmark.
Even so, there is little evidence so far of substantial
changes to spending habits, according to recent conversations
with more than two dozen industry participants.
Citadel, PDT Partners and Bridgewater all still provide
copious free food for employees. Citadel has produced modest
gains in its main funds this year while Bridgewater is down
slightly in its flagship hedge fund. Performance for PDT was
Decadent parties remain a perennial favorite. Balyasny Asset
Management flew employees and their guests for a weekend at the
Fontainebleau Miami Beach hotel last November for its annual
business conference and holiday party event dubbed "BAM Bash."
The 2014 version of the same party in New York City featured pop
star Taio Cruz and acrobatic performers. BAM funds have produced
modest gains this year.
Renaissance Technologies still flies staff and their
families for an all-expenses paid vacation weekend. This autumn
the destination was a resort in Florida. And Two Sigma rented
out the Intrepid Sea, Air & Space Museum in New York for its
2015 holiday party; the venue in 2014 was the nearby American
Museum of Natural History.
Hedge fund offices continue to dazzle, even if returns do
not. Och-Ziff Capital Management, which has suffered investor
withdrawals due to a foreign bribery scandal and mediocre
performance, works in the $200 per-square-foot Solow Building in
Manhattan, one of the city's most expensive office towers.
Two Sigma's lower Manhattan office features spaces for
playing games, recording music and working out - including
fitness boot camps, meditation and same-day gym laundry service.
D.E. Shaw & Co's sleek midtown Manhattan headquarters feature
nap pods, a gym, game room and back-up childcare.
D.E. Shaw, Two Sigma and Renaissance use computer-driven
investment models, which means they compete for talent not just
with other hedge funds but also top technology companies known
for extensive employee perks, such as Alphabet Inc's Google
and Facebook Inc. Like many so-called quants,
all three firms have produced strong returns of late.
"While costs are certainly being scrutinized, the fact that
the environment is becoming more favorable to delivering
performance means that talent has to be retained," said Jack
Inglis, chief executive of hedge fund lobbying group Alternative
Investment Management Association. For that reason, he said, it
makes no sense to yank perks or other relatively modest budget
To be sure, some firms are making cuts.
Highland Capital Management slashed its conference budget in
half, even though its public Global Allocation Fund is up more
than 20 percent this year. It also recently traded its Solow
Building outpost for less-pricey space in the Times Square Tower
in New York
Brevan Howard, which has performed poorly this year, told
employees to use their personal phones for company business and
tightened its rules on travel.
Several hedge fund marketers, who drum up new customers for
funds, said they planned to engage in conference freeloading:
hanging around the venue of an event without entering, and
meeting with clients after-hours, thereby avoiding the price of
a ticket, which can cost between $5,000 and $15,000 per person.
Pershing Square, whose public fund is down 18.3 percent this
year through mid-November, is soon moving into new offices that
are 40 percent less expensive. There is one flourish in the
planned Hell's Kitchen, Midtown Manhattan space: a tennis court
on the roof.
Other hedge funds are postponing real estate decisions this
year, according to Ben Friedland, an executive vice president at
CBRE, pointing to a more than 50 percent yearly decline in new
leases signed by financial services firms, and a relatively high
proportion of them renewing short-term contracts.
"Many firms are choosing to punt," said Friedland.
Robert Olman, founder of recruitment firm Alpha Search
Advisory Partners, said firms are becoming more cost-conscious
given that performances fees are not yielding much.
"Twenty percent is not adding up to a lot these days," Olman
said, "So they are watching every dollar."
In some sign of change, a few large and relatively
successful firms have announced restructuring efforts.
Ray Dalio's Bridgewater, the world's largest hedge fund
manager with 1,700 employees and more than $150 billion under
management, said in September it was planning "significant
changes to people, processes and technologies," to address a
surge in staff numbers that led to its non-investment divisions
becoming "bloated, inefficient, and bureaucratic."
Billionaire hedge fund manager Paul Tudor Jones laid off
roughly five dozen employees in August, or about 15 percent of
his Tudor Investment Corp workforce. Pershing Square cut 10
percent of its staff in June when founder and head Bill Ackman
laid off eight lower-level employees. And Daniel Och's Och-Ziff
has seen its headcount decline by about 17 percent this year, a
combination of layoffs and departures.
Others have closed foreign offices, including TPG-Axon
Capital and Hutchin Hill Capital, or shut down altogether,
including Perry Capital and Nevsky Capital.
Lisa Baird, a hedge fund specialist at Heidrick & Struggles,
said the executive search firm is now getting more inquiries
related to restructuring. The discussions with clients include
the issue of whether pay for some roles is too high, given lower
salaries for similar roles outside of the hedge fund industry.
"There has definitely been a premium paid by hedge funds for
many roles," Baird said. "That is coming into question with the
squeeze on fees."
For now though, most thoughts of big changes have not
translated into action.
Anthony Keizner, a partner at recruitment firm Odyssey
Search Partners, said many fund managers know changes could be
necessary, but it is hard to be among the first the make a big
shift given the potential for loss of talent.
"I've heard people say 'Maybe we're the frog in the boiling
water scenario - we don't realize yet we should be changing.'"
(Reporting by Lawrence Delevingne; Editing by Bill Rigby)