Even as US equity markets soar, pay levels in the asset management industry are on the decline in 2016, marking the second consecutive year of reduced compensation for professionals at traditional asset management firms and the third for hedge funds.
The 2016 edition of the Asset Management Compensation Report, published annually by Greenwich Associates and Johnson Associates, shows that even with major investment indices hitting record highs, pressure on asset management profit margins is driving reductions in pay.
For traditional managers, the rising popularity of passive investment strategies has put their own active management fees in the spotlight for investors. The pressure is much greater in the hedge fund industry, where uneven performance has caused investors to push back against the traditional “two-and-twenty” fee structure. Meanwhile, costs are on the rise.
“The reality is that compensation is not likely to recover to recent market highs and might even fall further in coming years,” says Johnson Associates managing director Francine McKenzie.
On the flip side, asset management professionals are still faring better than their counterparts on the sell side, who have endured head-count reductions, stagnant compensation and depressed morale caused in part by regulatory burdens. “Even several years of compensation reductions will not stop the flow of talent from the sell side, which sees the buy side as offering at least equal potential financially, with much better quality of life,” says Greenwich Associates analyst Kevin Kozlowski (pictured).
Overall buy-side compensation levels declined at least slightly from 2014 to 2015, and professionals in both equity and fixed income expect that negative trend to continue in 2016.
Across the industry, 2016 incentives are expected to drop by approximately 10 per cent from 2015 levels. The pain will be greatest for hedge fund professionals, who expect incentives to decline some 10 per cent to 15 per cent, compared to 5 per cent to 10 per cent declines predicted for professionals at traditional firms. “Hedge fund compensation still has not recovered from its steep decline from the 2013 high, and we do not expect to see a return to those levels anytime soon,” says Kozlowski.
While overall asset management compensation was flat to slightly lower from 2014-2015, one job title bucked that trend. Average pay for analysts increased approximately 12.5 per cent last year.
The compensation advantage for fixed-income professionals at hedge funds continued to narrow to just 1.3 times the level at traditional firms. Average compensation in fixed income in 2015 was USD610,000 for hedge funds professionals versus USD470,000 at traditional firms.
However, equity professionals at traditional asset management firms out-earned their counterparts at hedge funds in 2015. Hedge funds' historic compensation premium has been upended, with professionals at traditional firms earning an average USD800,000 versus USD560,000 for hedge funds.