For my more up-to-date views about industry pay, see my blog post from February 2018: How to Better Align Money Managers With Their Clients.
Over the past couple months I have written and talked about management compensation quite a bit. This has led to me thinking about my own compensation recently, and just like with CEOs, I’m not sure if any fee structure is perfect. Non-qualified investors can’t legally be charged performance-based fees so those clients are easy—2% of assets under management (AUM) is what I charge which is pretty standard. More discrepancies come into play with qualified investors ($2 million net worth excluding primary residence) who can legally be charged a percentage of profits that the money manager earns.
The industry standard for hedge funds is 2 & 20. That is, the money manager earns 2% of AUM (the management fee) plus 20% of net profits (the performance-based fee). Thus, if a manager returns 32% one year, the client pays him 2% of assets plus 20% of the net profits, which is 20% of 30%, or 6%. Altogether the money manager gets paid 8% of that client’s AUM that year, and most people would say it was well deserved for such large returns. But what if the overall market gained 35%—does the manager still deserve to be paid so well even though they underperformed the broader market?
Continue reading “How Should I Be Paid?”