Decoding Success and Happines: Hedge Fund Management Beyond Average Returns

As a hedge fund manager, the path to success is often fraught with challenges and high expectations. The compensation structure is designed to ensure that managers are motivated to not just meet but exceed performance benchmarks. However, for some, the idea of staying 'average' and enjoying a stable life post-work is appealing. This article aims to explore whether such an approach can be viable within the hedge fund industry and whether achieving 'average' returns can lead to long-term success and happiness.

Understanding the Hedge Fund Compensation Structure

The financial landscape of a hedge fund manager is tightly woven around the management fee and the incentive fee (also known as carry). The management fee operates as a loan where the manager must earn a return that's at least 20% higher than the most comparable benchmark index before they can earn their first dollar of carry. The carry itself works as a performance-based reward, requiring the manager to consistently outperform the market.

For those who prefer to 'stay average,' the traditional framework often fails to support this strategy. The pressure to consistently generate alpha (active fund performance relative to the benchmark) is immense. However, there are nuances and strategies that allow some hedge fund managers to achieve a more balanced and sustainable career path.

Choice and Strategy: The Path to 'Average' Returns

The question at hand is not strictly about underperforming, but rather about choosing to focus on stability and a more manageable lifestyle. In the words of one financial advisor, it is possible to 'put up average returns' as either relative performance or in absolute dollar generation, maintain employment, and enjoy a fulfilling personal life.

Several veteran hedge fund managers operate under this philosophy. Their primary goal is to earn a consistent yearly bonus, such as $1 million, and then transition into a lower-key phase where they significantly reduce their risk and work volume. This approach often leads to a more relaxed professional life, with titles that graduate above the junior levels (like Director) but fall short of the mid-level or senior management positions. For these professionals, the key is to maintain profitability while avoiding the pressures of scaling up their operations or managing large teams.

Challenges and Opportunities

While there are examples of successful 'average' strategies within hedge funds, it's important to note that the vast majority of funds are highly competitive environments. Managers who do not consistently strive for and deliver above-average returns are often pushed out. In a dynamic market, managers are expected to adapt and perform beyond expectations to ensure long-term employment and profitability.

However, a few distinct factors can make this approach viable. Firstly, having the right relationship with the fund's ownership, control, and management groups is crucial. This often involves a delicate balance of demonstrating value and maintaining a positive relationship within the organization.

Secondly, the choice can be further supported by the presence of a unique set of funds that value stability and profitability over aggressive risk-taking and expansion. For these funds, a systematic approach to risk management and consistent performance are prioritized.

The Purpose of Markets: The Importance of Long-Term Goals

For many high-performing professionals, the markets themselves serve as a driver for continuous improvement and dedication. Among peers who have consistently outperformed benchmarks, the commitment to the market is fundamental. Many work exceptionally long hours, often averaging 85 hours a week, to maintain their superior performance.

However, the desire to maintain a more balanced life, combined with reliable returns, can lead to a different career trajectory. Some managers are able to achieve financial stability and long-term satisfaction by transitioning into a more manageable role after years of successful performance. This transition can often be facilitated by a deft political touch and a supportive network within the organization.

Conclusion

Deciding to 'stay average' as a hedge fund manager is a personal choice that requires careful consideration. While it may be challenging to find a path that aligns with this vision within a highly competitive industry, there are opportunities for those who can navigate the complexities of fund management and relationships. The key lies in balancing ambition and stability, achieving long-term goals, and maintaining a fulfilling personal life.