Och Ziff Hedge Fund
Och Ziff's Compensation Leads to LossesThe hedge fund industry, along with other investment areas, has received a fair amount of criticism over compensation. With the recession hurting returns and investors withdrawing from funds, paying the high compensation that hedge fund professionals are used to has become an enormous cost for many hedge funds simply trying to stay afloat.
A cautionary tale is that of Och-Ziff Capital Management which has drawn a lot of criticism after reporting a second quarter loss this week primarily because of its salaries and bonuses. The $20.7 billion hedge fund firm has to pay $47.6 million in total compensation to its staff at the end of this year. Despite the rough year for hedge funds, bonuses are nearly 75% more than the same time last year.
Och-Ziff's assets under management have grown 2% since April 1, 2009 and performance has improved in all four main hedge funds but the firm's management fees have fallen an incredible 42% from last year. One can assume that a draw for investors has been the reduction in fees along with better performance, so the rise in AUM is likely at a loss for the firm because of the income its had to forego. Despite some hedge funds decision to reduce fees to entice investors, most of the industry has stayed firm against drastically cutting fees.
Interestingly, a study by Grahall Partners found that the majority of hedge funds do not have a formal compensation policy. This means that how employees are paid is typically up to the General Partner and with many hedge funds still below their high water mark, hedge fund employees are seeing cuts in their compensation. This is a problem for cost-cutting hedge funds looking to hire or retain top talent because other financial firms or hedge funds may take advantage to recruit would-be hedge fund traders.
With hedge funds refusing to offer competitive compensation plans until revenues stabilize Claude Schwab of Heidrick & Struggles sees a trend, “There is a large amount of movement of senior investment professionals to different places, people who are at the top of their game. Some of the best talent will be moving before year’s end and this indicates that people at the top of the hedge fund are not dipping into their own pockets."
Tom Roth, a consultant at Grahall, says there is no “boilerplate” approach to hedge fund pay given the myriad of asset sizes and strategies that characterize hedge funds. One Grahall client that oversees about $1 billion in AUM is considering launching a private-equity fund. “The question they are asking is how do I pay the private-equity guys vis-à-vis the hedge fund guys? They need to work closely together, but the time frames for how private-equity professionals are paid tend to be much longer than they are for hedge funds,” Roth says.
Another client is 100% owned by the founder who is now considering extending LP to a key portfolio manager. “The question is, how does the founder bring him into the partnership?,” Roth says. The manager has been with the hedge fund since its inception and currently earns salary and a discretionary bonus. Roth says he may end up with some equity stake in the hedge fund. “Sometimes firms give that equity stake and sometimes they create an opportunity for individuals to purchase shares in the firm. There’s no right or wrong answer for how to do this,” he says. “It depends on the particular circumstances of the firm.” Whole story
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