Is an MBA an asset or a liability when the axe falls at hedge funds?

06 Jan 2009

Optimistic analysts and economic commentators are apt to interpret a downturn as a “cyclical bear in a secular bull market”.  It seems that this phrase can also describe the current state of the the hedge fund job market.  Few question that last year was an annus horribilis for the hedge fund industry.  But Euromoney reports on a survey conducted last summer by the website Hedge Fund Jobs Digest that reached a number of surprisingly rosy conclusions.  The president of Hedge Fund Jobs Digest tells Euromoney that despite the turbulence, “There is still a strong flow of private equity and hedge fund hiring.”

Bear in mind that the survey was conducted pre-Madoff and prior to drawdowns experienced by so many hedge funds in the second half of 2008.  But it’s still interesting to note that hedge fund career opportunities went into the second half with a considerable amount of momentum.

In fact, satisfaction with hedge fund job compensation rose from 25% to 42% last year and the hours worked by a typical employee remained pretty tame as the chart from the survey below indicates:

With an average total compensation of around US$250,000, that’s about US$85 an hour.  Not bad.  But what’s kind of surprising is that those employees with an MBA made marginally less than those without an MBA – and they get more vacation.

The significantly higher bonus suggests one of the likely causes for this phenomenon: Highly-bonused positions seem to be populated by non-MBAs.

In any case, about half of hedge fund compensation seems to come from discretionary bonus and half from salary.  So when revenue gets cut in half, what happens?  Compensation is by far the largest expense faced by hedge funds.  So a fall in AUM would likely impact overall compensation expense commensurately.  As IDD Magazine reported in December:

“Hedge funds, which have long attracted Wall Street professionals with the promise of hefty salaries and bonuses, are now cutting staff in an effort to reduce expenses.

Much of the overhead a hedge fund has is related to salaries. So, if assets under management drop 50% due to a combination of redemptions and negative returns, these firms cannot support the same overhead.”

If hedge fund managers “can’t support the same overhead”, then managers must look at layoffs in order to maintain some level of bonus for remaining employees.  Some of the calculus that goes into this trade-off (between reduced bonuses and lay-offs) was contained in an interesting report we mentioned last month (see post).  But if bonuses are reduced before heads in 2009, then the data above suggests non-MBAs may be more likely to see their compensation cut, while MBAs may be more likley to see their heads cut.

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  1. Jason Johnson
    January 7, 2009 at 1:43 pm

    There are a record number of people taking the GMAT this year. It will be interesting to see if people still value an MBA in a couple of years, after what has happened on Wall Street.

  2. Senthil
    January 12, 2009 at 8:03 am

    Though the experience always counts, the fact is education and experience go hand in hand in all the field and hedge fund is not an exception.Due to decrease in AUM its obvious that hedge funds will opt to reduce their over heads and the MBAs who are paid hefty compensations,are more likely to face the threat. But then, if the industry wants to be back to its golden era, it cant be done completely without MBA s.

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