Introduction – How Much Do Hedge Fund Managers Make?
How Much Do Hedge Fund Managers Make? The average Hedge Fund Manager makes $105,451. It can range from $20,239 to $541,382, with a median salary of $97,845. According to Comparably
the middle 57% of Hedge Fund Managers make between $97,852 and $245,495, with the top 86% making $541,382.
If you’re like me, you’ve probably watched The Big Short a few times and wondered how much those guys who bet against the housing market made. Or maybe you’ve seen Billions and fantasized about living like Bobby Axelrod, the billionaire hedge fund manager who can buy anything he wants. Or maybe you’re just curious about how the world of high finance works and how much money is involved.
Well, you’re not alone. I was intrigued by this question too, so I decided to do some digging and find out how much hedge fund managers actually make. And let me tell you, it’s not as simple as you might think. There are a lot of factors that affect how much a hedge fund manager earns, such as the size of the fund, the performance of the fund, the fees they charge, the bonuses they get, and the taxes they pay.
In this post, I’m going to break down how hedge fund managers get paid, show you some real-life examples of their salaries, and give you some tips on how to become one (if that’s your dream). By the end of this post, you’ll have a better understanding of how much hedge fund managers make and why it varies so much. So buckle up and get ready for a wild ride into the world of hedge funds!
From Salary To Commission Ladder
If you’re thinking of becoming a hedge fund manager, you might be wondering how they get paid. Well, it’s not as straightforward as you might think. You see when you join a hedge fund – whether it’s a small independent one or a big one affiliated with an investment bank – you will get a base salary.
But… and this is a big but, your salary won’t last forever. Let me explain. What hedge funds do is they gradually reduce your salary each year until it reaches zero. Yes, you heard me right, zero. Instead of paying you a fixed amount, they will pay you a percentage of the assets under management (AUM) that you manage or help manage for another senior hedge fund manager. This is called a commission.
The idea behind this is to align your interests with the fund’s performance. The more money you make for the fund, the more money you make for yourself. The less money you make for the fund, the less money you make for yourself. Simple, right? Well, not quite. There are a lot of factors that affect how much commission you get, such as the size of the fund, the type of the fund, the fee structure of the fund, and the market conditions.
Commission Structure: Gross Revenue And Grid Payouts
You might think that salary is the main source of income for hedge fund managers, but you’d be wrong. Salary is just the appetizer, commission is the main course. And trust me, you want a big slice of that pie. Just ask Matthew McConaughey in The Wolf Of Wall Street. He knows what I’m talking about. Well, at least when it comes to commission, not the other stuff that got him in trouble.
As a hedge fund manager, your commission is based on how much money you manage for your clients. The more money you manage, the more money you earn. For example, a typical management fee is 0.5% to 1% of the assets under management (AUM). So if you manage $100 million and charge 0.5%, you would earn $500,000 that year.
But, there’s always a catch. The $500,000 is not yours to keep. It goes to the hedge fund firm first. What you get is a portion of that amount, called a “grid payout”. The more senior you are, the higher your grid payout percentage is.
When you start out, you might get 20% to 30% of the grid payout, which means you would earn $100,000 to $150,000 in commission. But as you climb up the ladder, you might get 50% to 60% of the grid payout, which means you would earn $250,000 to $300,000 in commission. Not bad, huh?
How Hedge Fund Managers Make Billions?
Firstly, you’ve probably seen those movies or shows where the hedge fund manager is a billionaire, living the high life and buying whatever he wants. You might wonder how they got there and what it takes to join their club. Well, it’s not easy, but it’s not impossible either. Here’s how they do it.
Secondly, they start out working in a small fund that doesn’t have a lot of money to manage. They learn the ropes and become experts at investing, raising money, managing a portfolio, and so on. Year after year, they increase their assets under management (AUM), either by growing their existing fund or by starting a new one.
Thirdly, to become a billionaire as a hedge fund manager, you need to have $25 billion in AUM, keep up with the market (avoid any huge losses), and maintain that level for 10 years. The math is based on the assumption that you didn’t save any money until you reached $25 billion in AUM. From then on, you would earn about $125 million per year in fees. Pay half in taxes, spend $12.5 million per year on fun stuff, and reinvest the remaining $50 million. With your fund and your net worth growing 10% per year on average (the same as the S&P 500), you would be worth $1.1 billion at the end of the 10 years! Amazing, right?
Before You Go – How Much Do Hedge Fund Managers Make?
Don’t get me wrong, I love movies and shows about hedge fund managers, but they don’t show the whole picture. They only show the top 1% of the industry, the ones who make billions and live like kings. But what about the rest of them? How do they make money and how much do they make?
Well, it all comes down to one thing: assets under management (AUM). The more money you manage for your clients, the more money you earn in fees and commissions. The better you are at your job and the more senior you become, the higher your percentage of the fees and commissions. That’s how you grow your income over time.
If you want to see how this works in practice, check out this awesome infographic from the wealth management interview blog. They have some great information on how to prepare for interviews in the hedge fund management or wealth management industry. You can find them here.
You might want to read about Wealth Managers, they are similar to Hedge Fund Managers but not exactly! Find out more here.
Other Posts You Might Like:
Wealth Preservation: How to Safeguard Your Fortune
