ZeroHedge says hedge fund salaries are in the toilet and headed down the drain.
Everyone knew it was going to happen just not when. The when is now, according to Jon Pierson president of recruiting company 10X partners as quoted by Hedge Fund Alert. Latest market data indicate that the base salaries for portfolio managers working for medium hedge funds in the $300-$500 million ballpark, have dropped by almost 50% from $300,000-$350,000 to $175,000-$200,000, and even veteran PMs are seeing their base cut.
Additionally, performance pay will be whacked too: while PMs may not make any money at all if their books or funds have lost money (great to know if you are raking in $$$ on those shorts while all your colleagues are perma bulls and about to scuttle your fund), their percentage of the fund’s performance fees (assuming you don’t have a Citadelesque 100% to climb before you hit your high water mark) will be cut drastically and much better performance will be needed to even get back to historical payoff levels. Lastly, if PM’s previously counted on getting 1% on the management-fee of the overall fund, this number will now be 0.50% and even 0.25% in most cases. Oh, and about those guarantees and signing bonuses… history.
(hat tip, Krazy Kat)
Morgan Stanley to write off 60% of value of its $8.8 billion real estate fund.
MSREF and other “opportunity funds” were among the many tantalizing investments sold by Wall Street to large institutions over the past five years. Opportunity funds are different from other real-estate funds in that they make extra use of borrowed money for purchases, sometimes more than 70% of the value of the properties, compared with about 50% for more traditional real-estate investments. The leverage makes it easier to produce higher profits if values rise. But if they fall, the decline can quickly wipe out equity.
For the fund managers, there was another benefit: Opportunity funds rewarded them with high fees and a cut of any increase in asset value. Across Wall Street, the value of the assets held by opportunity funds jumped from $134 billion at the end of 2005 to $280 billion at the end of 2007. Many of the buildings in the funds are now worth less than their mortgages. Even worse, some of them are no longer producing enough cash flow to service their debts, meaning the funds have to invest more or face foreclosure. Industry experts say write-downs in excess of 50% for 2008 will be typical.
And there’s this:
The appearance of dismal returns shows how steep losses sustained by the commercial real-estate industry are being absorbed by retired teachers, policemen and other beneficiaries of the institutions that were chasing the funds’ high returns. The looming losses will likely increase the pressure for higher taxes to shore up government-employee pensions and more cutbacks at universities and foundations.
When the market pummeled State Street Bank’s shares last fall, the experts said the market was off its rocker. That was before the bank admitted to $9 billion in losses on worthless paper, as posted here yesterday.
State Street (STT) remains down about 50% today after warning on earnings and raising concerns about serious damage to its balance sheet. But today aside, let’s go back to last November when, seemingly out of nowhere, the stock fell below $30, beforre quickly rebounding to the mid-$40s. At the time, everyone thought the market was crazy. That there was no way there could be anything wrong with State Street — a boring old investment services company.
Well, turns out, only the talking heads were wrong. The stock market nailed it, only it didn’t punish the companyt hard enough, since now State Street is at about $19.
This is important to remember everytime you hear anyone complaining about how market prices are temporarily irrational and that they know better. This isn’t to say that sometimes the herd can push too far in a given direction. That happens all the time. But on balance, you should be inclined to trust the market more than an individual who swears the market is wrong.
What Weisenthal doesn’t ask, but I will, is who knew about State’s bad assets back in November, and how did they know?