Tuesday, November 27, 2018 Stamford, CT USA — A bout of Q3 market volatility interjected an element of uncertainty into asset management compensation expectations for 2018, according to the annual compensation report released today by Greenwich Associates and Johnson Associates.
Greenwich Associates and Johnson Associates are projecting asset management incentive compensation will increase by approximately 5% this year. Although that number represents a respectable year-on-year increase, the estimate was leaning higher just a few months ago.
Despite meaningful asset growth in the past year, asset managers remain under tremendous pressure. Year over year, AUM increases have been driven mainly by asset appreciation as opposed to inflows, and a gradual but steady compression of management fees is eroding industry profit margins. Margin preservation—along with investment spending on technology—is eating into 2018 incentive compensation pools, according to the new report, Market Volatility Adds to Uncertainty in 2018 Compensation Season.
“Volatility and slowed business momentum have added uncertainty and introduced an element of downside risk that could push final pay numbers lower if markets remain unsettled,” says William Llamas, Greenwich Associates Institutional Relationship Manager.
More Variability in Pay
Reflecting the market volatility, compensation levels will vary widely. While compensation at most organizations will come in flat to up 7%, some managers will be down and some professionals will actually experience declines in their pay. Overall, compensation increases at traditional asset management firms will outpace those at hedge funds.
For hedge funds, although AUM has reached record levels for eight consecutive quarters, profits have come in below the historic average due to volatility in performance fees and more frequent fee negotiations with clients. As a result, Greenwich Associates and Johnson Associates are projecting hedge fund incentive compensation will increase only 3% this year.
Across asset management, the biggest pay increases will come in “hot” areas that have been the focus of investor demand and outperformance over the past 12 months, including growth equity funds (especially those with a tech focus), exchange-traded funds (ETFs), higher-risk fixed income (such as emerging markets), and private equity (especially in credit and real estate funds). More than ever, compensation will also vary from individual to individual within organizations, with the healthiest increases going to high-impact support professionals in technology, as well as those in product strategy and development roles.
Compensation Breakdown: Fixed Income vs. Equities
In fixed income, the overall pay differential between hedge fund employees and their peers at traditional asset management firms widened to more than two times last year, driven largely by a roughly 4% decrease at traditional firms. Average 2017 compensation in fixed income was $1.06 million at hedge funds versus $470,000 at traditional firms.
”While incentive compensation for traditional firms is expected to outpace that of hedge funds in fixed income in 2018, that advantage won’t be enough to meaningfully close the gap,” observes Johnson Associates Managing Director Francine McKenzie.
In equities, professionals at traditional asset management firms were out-earning their hedge fund counterparts as recently as 2016. That trend reversed course in 2017, and hedge funds are projected to maintain their pay lead this year. Overall 2018 compensation is expected to average $900,000 at hedge funds versus $710,000 at traditional firms.