A Fund vs. Your Own Money

[heech]

Quote from newwurldmn:

Most of these big funds are multistrategy with the exception of Bridgewater. They are all a collection of smaller managers (with 50-500MM books) with some overall risk management umbrella.

And that's something I've been meaning to ask about, actually... what's the typical capacity found in any one of these strategies / managers? I've also heard similar numbers (a few hundred million) per manager/strategy at SAC, for example.

Is that pretty common? Are most of the billion dollar funds out there really just collections of $200 million mini-funds?

 

[sle]

Quote from heech:

And that's something I've been meaning to ask about, actually... what's the typical capacity found in any one of these strategies / managers? I've also heard similar numbers (a few hundred million) per manager/strategy at SAC, for example.

Is that pretty common? Are most of the billion dollar funds out there really just collections of $200 million mini-funds?

Most large funds are multi-strategy in one way or another - sometimes they would have multiple PMs and sometimes they would have multiple traders (the distinction is mainly in the compensation model). Capacity varies - sometimes, the expectation is that a PM would make 10 million and some times it's a 50 million, depending on the strategy and the capital allocation.

 

[heech]

Quote from sle:

Most large funds are multi-strategy in one way or another - sometimes they would have multiple PMs and sometimes they would have multiple traders (the distinction is mainly in the compensation model). Capacity varies - sometimes, the expectation is that a PM would make 10 million and some times it's a 50 million, depending on the strategy and the capital allocation.

$10-50 million gross in trading gains per annum...?

Just backing out the numbers there... if 2/20, then the fund as a whole would make roughly $2-10mm in fees per "sub" PM? And aren't most of these "sub" PMs taking home something like 20-40% of fees earned?

That seems low to me... $400k-$4mm in annual compensation? Or is that about right?

 

[sle]

Quote from heech:
And aren't most of these "sub" PMs taking home something like 20-40% of fees earned?

Usually, there is no relation to the actual fees - that goes to the partners. The formulas I've seen where anywhere from 8% to 15% of total revenue, but you'd get charged for the cost of capital. E.g. if a PM made 10mm on a 50mm book, the formula is 10% and cost of capital 1%, the total comp will be approximately $950k=(10mm - (50mm*1%))*10%.

PS. Some people get much better deals where their formula varies based on Sharpe and could be higher - I know people that get 18% of their revenue (but get charged for expenses) and I even hear of some deals for capacity constrained people where you get 30% if you producing Sharpe north of 3.

 

[heech]

Quote from sle:

Usually, there is no relation to the actual fees - that goes to the partners. The formulas I've seen where anywhere from 8% to 15% of total revenue, but you'd get charged for the cost of capital. E.g. if a PM made 10mm on a 50mm book, the formula is 10% and cost of capital 1%, the total comp will be approximately $950k=(10mm - (50mm*1%))*10%.

PS. Some people get much better deals where their formula varies based on Sharpe and could be higher - I know people that get 18% of their revenue (but get charged for expenses) and I even hear of some deals for capacity constrained people where you get 30% if you producing Sharpe north of 3.

Appreciate the insight.

Color me naive, but I assumed that these PMs/traders working at top funds were taking back very large paychecks. If their bosses (the Cohen/Paulson/Jones of the world) are making hundreds of millions a year, I would have thought these actual producers directly generating all of the funds' actual profits would have brought home... I don't know, tens of millions?

But from what you're saying, it sounds like they'd most likely, even in a good year, be taking home in the $3-5mm range.

 

[sle]

Quote from heech:
Color me naive, but I assumed that these PMs/traders working at top funds were taking back very large paychecks. If their bosses (the Cohen/Paulson/Jones of the world) are making hundreds of millions a year, I would have thought these actual producers directly generating all of the funds' actual profits would have brought home... I don't know, tens of millions?

Obviously, it depends on the deal and the size of the portfolio but I would say that total comps over 10mm is fairly rare, you'd have to have a really good year and others in the fund would have to have an ok year too.

Think of it this way - "difficulty and expense adjusted", running a small fund vs the same size portfolio at a large fund are more or less equivalent in compensation. E.g. if a PM is making 20% on a 100mm book at a fund, the take is probably about 2mm with a 10% formula. As a fund manager, you'd make 20/2 so that's 2mm+4mm but out of that money you need to pay for everything - office, data, IT, compliance etc so you total take is probably 3-4mm. Adjust that for the hassle and difficulty of opening a fund and you have a tough choice between the two.

 

[TraDaToR]

Quote from CPTrader:

You know I am thinking hard of other "alpha generators" and perhaps only Tudor & Bridgewater come to mind. Do you agree with these choices? Who else would you list?

It's true it's hard to find >1B HF managers who are true alpha generators. Like Rationalize said, it must be easier to find in bank desks or big prop firms like Getco, Virtu, Jump...They are so confident in generating alpha that they don't even need ( kamikaze )investor money, they use their own...LOL

 

[heech]

Quote from TraDaToR:

It's true it's hard to find >1B HF managers who are true alpha generators. Like Rationalize said, it must be easier to find in bank desks or big prop firms like Getco, Virtu, Jump...They are so confident in generating alpha that they don't even need ( kamikaze )investor money, they use their own...LOL

But help me understand this... for whoever is managing the trade desk at the banks and is generating alpha independent of other bank business... why wouldn't they go into business looking to manage OPM?

Bank traders certainly make decent money, but nothing approaching top money managers.

 

[heech]

Quote from sle:

Think of it this way - "difficulty and expense adjusted", running a small fund vs the same size portfolio at a large fund are more or less equivalent in compensation. E.g. if a PM is making 20% on a 100mm book at a fund, the take is probably about 2mm with a 10% formula. As a fund manager, you'd make 20/2 so that's 2mm+4mm but out of that money you need to pay for everything - office, data, IT, compliance etc so you total take is probably 3-4mm. Adjust that for the hassle and difficulty of opening a fund and you have a tough choice between the two.

Those numbers do make sense. There's only so much profit being generated off of 20% returns off of a $100 million book... and it really seems to suggest that in this industry, just as is the case in many others, the biggest money comes from managing productive people rather than producing yourself.

 

[newwurldmn]

Quote from heech:

But help me understand this... for whoever is managing the trade desk at the banks and is generating alpha independent of other bank business... why wouldn't they go into business looking to manage OPM?

Bank traders certainly make decent money, but nothing approaching top money managers.

Most of those "alpha" seats are dependent on some aspect of the bank platform (research access, funding access, flow access).