A new report predicts that there will be “unpleasant surprises” during bonus season next year.
The infamous Grinch had a change of heart when he tried to steal Christmas from Who-Ville, but he may have stolen the 2016 bonuses from the buy side instead.
Remuneration for the asset management industry has been declining in 2016, and that will be reflected in annual bonuses that will be handed out early next year, according to the latest edition of the Asset Management Compensation Report published annually by Greenwich Associates and Johnson Associates.
The report title says it all: “Another Gloomy Bonus Season for the Buy Side.” It provides evidence that for the second year in a row 2016 will yield lower compensation for traditional asset management firms and hedge funds, despite major investment indices “hitting record highs.”
Industry-wide, the 2016 incentives may drop by approximately 10 percent from 2015 levels, according to the report. “The pain will be greatest for hedge fund professionals, who expect incentives to decline some 10 percent to 15 percent, compared to 5 percent to 10 percent declines predicted for professionals at traditional firms.”
Compensation for hedge funds “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 Greenwich Associates analyst Kevin Kozlowski, in a statement.
In addition, the “compensation advantage” for fixed income professionals at hedge funds “continued to narrow to just 1.3 times the level at traditional firms,” according to the report. “Average compensation in fixed income in 2015 was $610,000 for hedge funds professionals versus $470,000 at traditional firms.”
Yet those working in equities 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 $800,000 versus $560,000 for hedge funds,” according to the report.
Overall, the lower bonuses and pay are ripple effects caused by the pressure put on the profit margins of asset managers. “Even after recent disappointments in pay, this year’s bonus season could bring some unpleasant surprises,” according to the executive summary of the report.
The reason is that in 2015 “for the first time in recent memory, some traditional asset management firms faced difficult conditions but found ways to avoid or at least minimize compensation cuts. In the face of continued business headwinds, that will be much harder to do this year [2016] — and even more difficult for hedge funds, some of which are feeling extreme pressure following several consecutive years of disappointing performance,” the report says.
In addition, traditional managers have seen “the rising popularity of passive investment strategies,” which has put active management fees under greater scrutiny by investors, according to the report. “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.”
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, in a prepared statement.
There was one bright spot in the gloomy report.
“While overall asset management compensation was flat to slightly lower from 2014 to 2015, one job title bucked that trend,” according to the report. “Average pay for analysts increased approximately 12.5 percent last year.”
By contrast, buy-side asset managers apparently “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,” cites the report.
Those on the sell side may start looking for greener pastures.
“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,” Kozlowski says.
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