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 money management firms and the third for hedge funds, said a new report by Greenwich Associates and Johnson Associates.
Across the industry, 2016 bonuses are expected to drop by about 10% from 2015 levels. The pain will be greatest for hedge fund professionals, who expect bonuses to decline some 10% to 15%, compared to 5% to 10% declines predicted for professionals at traditional firms.
Last year, some traditional asset managers found ways to avoid or at least minimize compensation cuts. That will be much harder to do this year in the face of continued business headwinds, the report said.
“This will be even more difficult for hedge funds, some of which are feeling extreme pressure following several consecutive years of disappointing performance,” the report said. “As major investment indexes have climbed to record highs over the past 12 months, another pay reduction might come as unexpected news, particularly for portfolio managers that have notched solid investment returns in their own funds this year.”
Average compensation for fixed-income professionals in 2015 was $610,000 at hedge funds vs. $470,000 at traditional firms. However, equity professionals at traditional asset management firms outearned their counterparts at hedge funds in 2015 — $800,000 at traditional management firms vs. $560,000 at hedge funds.
Pressure on money management profit margins is driving these pay cuts, the report found. On the revenue side, investors are pushing asset managers to reduce fees.
Meanwhile, costs are on the rise. Technology expenditures are up and new regulations have increased compliance costs for managers.
Challenges such as fee erosion, rising costs, slow growth in revenues and margin contraction appear to remain in place and perhaps even grow in 2017, the report said. In the fourth quarter, money managers are looking at steps to reduce their cost bases, including headcount reductions, office relocations and compensation cuts, it said.
Moving into next year, Greenwich Associates and Johnson Associates expect ongoing pressure on compensation levels, as clients continue to push back on fees, and regulations and fiduciary standards are finalized and implemented, resulting in increased costs and complexity in compliance.
The report, “Another Gloomy Bonus Season for the Buy Side,” is available on Greenwich's website.