How to negotiate a contract when you're hired by a hedge fund now

You want to join a multistrategy hedge fund and earn the sort of extreme amounts of money for which such funds have become well known. 

Good luck with that. The world is full of people who want to work for big multistrategy hedge funds and in the words of hedge fund headhunter John Pierson, almost none succeed. "There is a massive funnel [of talent] and a very, very narrow route to success," he informs us. "On the whole 0.01% of people make it to the bottom of the funnel."

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If you do make it to the bottom of the funnel, though, you are not without power. For the best people, Pierson says hedge fund contract negotiations are becoming increasingly "bespoke." 

This is what might be negotiated. 

Your exact strategy and capital allocation under different conditions 

The worst thing that can happen when you join a fund is that they decide they don't like your strategy after you join. For this reason, it is in the interest of both parties to clarify exactly what kind of strategy you will be pursuing.  

Peter Henry, a commodities headhunter in New York, says it's becoming increasingly common for commodities portfolio managers in particular to put detailed rubrics together explaining exactly which trades they would make under different market conditions. These are time consuming but provide clarity for both parties, says Henry. "Portfolio managers see rubrics as mitigating their risk before they make a move. They're a time commitment, but at least they then know how the fund will respond to different trades," he says. 

This matters because hedge fund careers can be upended when funds freak out and withdraw capital from portfolio managers (PMs) unexpectedly. "The allocation of capital was completely random," says one macro PM who joined a well known fund, only to leave soon after. The more you can get in writing the better. 

Your risk parameters 

There's some dispute over whether risk parameters are up for negotiation. If you have a detailed rubric agreed before you join, then they will be implied within it. One senior portfolio manager who's just joined a new fund says risk parameters are not part of the discussion.

However, Pierson says they can be. Sometimes. "80% of portfolio managers are on some form of 2.5 and 5," he says, referring to the rule whereby a loss of 2.5% means half your capital is pulled and a loss of 5% means all your capital is pulled. 

While most PMs operate within these confines, 20% don't. Maybe they have rubrics? Maybe they've negotiated more flexibility from the outset?

"Sometimes a fund will let you go 20% long and take more risk," says Pierson. "But this is negotiated from the outset. Funds have the ability to lean, to take the handcuffs off."

Your business plan 

If you're joining a fund as a senior portfolio manager running a pod, you will need to agree both your strategy and your business plan. Your business plan will detail potential hires. It will also detail all the costs that are netted against your profits. Jared Kubin, a former analyst at Balyasny Asset Management, notes that these costs include everything from financing and leveraging trades, to paying for Bloomberg terminals to data, and salaries for your team.

The cost you negotiate as a senior PM will influence your net profit (PnL). Your net profit is what determines your pay. 

Your formula 

If you're a portfolio manager, your pay is a % of your net PnL. It's usually 12% to 25%, says Kubin. Sometimes it's more. There are unconfirmed suggestions that DRW might "dangle" 30%. BlueCrest is said to pay 30% too.

Some funds have begun offering "accelerators." These offer a higher percentage at the outset, "Some funds will give you 30% on your first $50m" says one headhunter. "There's a lot of this in the second tier." 

Your deferrals and investment in the fund 

It used to be the case that hedge funds paid cash. Now even the biggest funds are implementing deferrals. These deferrals typically mean that you are obliged to invest a portion of your bonus in the fund. You may have to pay fees on these investments. Funds like Citadel, QRT and BlueCrest defer for around three years in total. Singapore hedge fund Quantedge only allows investors to remove 10% a year, implying a 10 year deferral period, including for employees. 

Your non-compete 

Lastly, there's the non-compete. Hedge fund non-competes are notoriously savage. Two years are standard. Citadel has the option of imposing four. Although non-competes are usually paid, no one wants to sit out the market for that long. "It's like being a footballer for Chelsea and then being told you can't play for a year," says one portfolio manager. 

We understand that one well known fund tries to impose unpaid non-competes. However, we also understand that it also regularly allows people to negotiate their way out of them.

All of the points above might be negotiated. None are set in stone. "Negotiating a hedge fund contract is very different to joining a bank," says one hedge fund manager. "You can negotiate as much as you like before you arrive but it's very difficult to prevent them from stopping you out once you're there." 

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