I get a newsfeed from FinAlternatives its always good for which hedge fund has gone broke, which one is being investigated for insider trading and which one is mysteriously relocating to a country with no extradition.
This morning I popped in to take a look and saw the following headline –
The opening paragraph proclaimed –
Pay at hedge funds surged last year, fueled by a big increase in bonuses—themselves fueled by strong returns at the industry’s best-performing firms.
Initially it looks as if we might simply have a few good firms dragging the others along but later in the article –
“This year, we discovered a significant correlation between fund profitability and bonus size,” report published David Kochanek said. “Employees of the best-performing hedge funds took home average bonuses of just over $200,000.”
I read this as all funds are paying more and the case is made that there is a correlation between performance and compensation. The linchpin of this argument is that performance has been good so pay is up as a result.
I went in search of a few metrics regarding the average performance of the industry this year. Interestingly good metrics are hard to find so I used a variety of sources to generate a composite view of what had happened in regard to the industries performance the past year.
The table below shows the relative performance of the BarclayHedge Index versus the total return from the S&P500.
As you can see last year, like so many other years, the industry under performed relative to the index. So I am at a loss to see what might have justified such an increase in pay. It is certainly not performance based.
This under performance is brought into sharp focus when you look at the returns generated in the first two months of this year versus the S&P500. To get a sense of the performance of the industry for this year, I looked at the performance for the year to date from a variety of sources that report on hedge fund performance and then compared this to the S&P500. The results are shown below.