As workers around the US frantically negotiate severance packages amid tens of thousands of layoffs, employees in a tiny, influential and often secretive corner of Wall Street are being promised some of their biggest paydays ever.
Welcome to the world of elite hedge funds, where risky bets using esoteric number-crunching and cutthroat strategies, applied to the same economic and market uncertainties that have roiled corporate America and led to job cuts, have produced gigantic profits.
Last year, Citadel, a hedge fund run by Kenneth C. Griffin, made $16 billion — the largest annual gain for a firm of its ilk, according to LCH Investments, an investment firm that collects data on the hedge fund industry. To continue their profit-making streak, Citadel and other industry behemoths like Millennium Management, Balyasny Asset Management and Steve Cohen’s Point72 are courting potential hires by dangling tens of millions in guaranteed pay over several years, people with knowledge of the negotiations said.
“You’re seeing Tom Brady-like pay packages,” said Colin Lancaster, a former Citadel executive who now works at Schonfeld Strategic Advisors, another hedge fund that is competing to hire top traders. (Before he retired, the American football star made $25 million per year, plus millions more in endorsements.)
Hedge funds, which often use various strategies to minimise, or “hedge,” financial risk, have always been a lucrative corner of the finance industry. Traders who can build complex and successful trading strategies tied to interest rates, stocks, commodities, currencies and other assets can make nine figures annually because they are typically paid a percentage of the profits they earn for investors in the fund.
What’s different now is that the biggest hedge funds are guaranteeing eye-popping compensation to traders before they even start. In the past, when firms have offered such guarantees, they usually stayed below $10 million.
It’s not that the entire hedge fund industry is throwing around such big pay packages. Although the industry has thousands of firms that oversee roughly $4 trillion on behalf of pension funds and other investors, according to data provider Preqin, only a handful stand out for their returns and largess.
The top 20 hedge fund managers made $22.4 billion for their investors in 2022 excluding fees, according to a report from LCH Investments. The entire industry, however, lost $208 billion in 2022.
Stefan Ericsson, a London-based trader who spent nearly a decade at Citadel trading bonds and other so-called fixed income, last year agreed to switch to Millennium, for what he told other potential employers was a guaranteed pay package of around $50 million over several years.
Ericsson left Citadel in June, but he won’t start at Millennium until September. Firms like Millennium, which manages about $50 billion, are offering such enormous pay packages that traders like Ericsson are willing to sit out more than a year before starting a new job. Firms often require former employees to go on “garden leave” before starting a new job so that they don’t take information with them to a competitor, but the waiting period is much shorter.
Ericsson referred inquiries to a spokesperson for Millennium, Guy Potvin, who said in a statement that the compensation figures Ericsson had quoted to associates were inaccurate, but declined to specify further.
Millennium has offered other new hires guaranteed pay approaching $60 million, according to people briefed on the confidential arrangements. In some cases, the large numbers compensate for money that traders leave behind when they move to a new firm.
Last year, US stocks fell nearly 20 per cent, while returns in the hedge fund industry overall fell only 4.2 per cent. But firms that use multiple trading strategies went in the opposite direction, generating returns of 9 per cent, according to a research report from UBS.
Some hedge funds have a dedicated investment style — say, investing only in stock markets for the long term. But hedge funds like Citadel and Millennium often invest using multiple strategies at the same time — or have multiple money managers direct funds to different assets like stocks, bonds or oil. That allows them to pull money in and out of those investments swiftly based on their read of market movements and economic trends. One right call can sometimes make up for losses elsewhere.
For instance, Citadel told investors that it earned a $16 billion profit because various bets on the direction of stocks, commodities and fixed income paid off at the same time.
Investors in hedge funds, like pension plans, endowments and wealthy individuals, are lining up to put their money into the most successful firms, according to industry experts. That is especially so because firms like Citadel substantially outperformed the broader market in 2022.
Investors as well as the most in-demand traders are gravitating toward the top “multi-manager” hedge funds, said Ilana Weinstein, founder and CEO of the IDW Group, a New York-based executive search firm focused on recruiting senior talent at hedge funds. “That’s where capital wants to be,” Weinstein said. “Talent is recognising that’s where they want to be.”
Because they have the upper hand, Citadel, Millennium and Balyasny, among other firms, have forced their investors to stay in their funds for years — meaning that even if investment performance dips, they won’t be subject to a run of withdrawals.
They have also been able to stick the bill for high pay packages to those investors.
Typically, hedge funds charge clients annual flat fees of 2 per cent on the money invested and an additional 20 per cent of profits generated, but the funds offering the biggest pay packages have even steeper fees and take larger cuts of profits. And increasingly, the top funds are requiring investors to pay the salaries of senior managers, on top of fees for technology and other costs.
For a hedge fund’s founders, the “pass through fees” can reduce the cost of big pay packages.
“Some of the bigger funds are now so established and so sought after that they have the luxury of saying — you want in? Be prepared to keep it there for awhile,” said Wendy E. Cohen, a partner at the law firm Katten Muchin Rosenman. “They can do it because they have the returns, and there’s so much demand for them.”
This article originally appeared in The New York Times.
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