A Unique Survey of Compensation Practices in the Hedge Fund Industry

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After a tumultuous year for the Hedge Fund industry in 2008, the industry faces unprecedented challenges, the impact from which will reverberate through 2009 and beyond. These challenges will be met by management companies making changes to business strategies as well as addressing issues on how to structure compensation and attract and retain talent.

The timing of this report is fortuitous, as 2008 was a tumultuous year for the hedge fund industry. Business conditions placed unparalleled strain on compensation program design and practices, and we believe this will continue to be a critical issue for hedge funds in 2009.

Grahall Partners, LLC recently released to participants the results of the 2009 Survey of Hedge Fund Compensation Practices. The survey was developed in collaboration with Kleinberg, Kaplan, Wolff & Cohen, P.C. and UBS Prime Brokerage Services.

This survey provides a unique perspective about the architecture of key compensation practices in the hedge fund industry. It differs from other hedge fund compensation surveys in three key ways:

  • The survey addresses how firms' compensation policies work, not how much compensation partners and employees receive.
  • Data was provided by principals or senior members of the firms surveyed, not by recruiters or other service providers, or self-reported by staff.
  • The focus of the survey report is on policies and structures, including topics such as the form of firm ownership, fee structures and retention policies, and how they relate to hedge fund compensation.

Survey results indicate that hedge fund compensation policies are informal and discretionary in many regards. Tom Roth, a Grahall consultant, commented that "The timing of this report is fortuitous, as 2008 was a tumultuous year for the hedge fund industry. Business conditions placed unparalleled strain on compensation program design and practices, and we believe this will continue to be a critical issue for hedge funds in 2009."

Key survey findings revealed that:

  • 60% of participant firms do not have a formal compensation policy (i.e., written and communicated).
  • 75% of participant firms do not use a standard sharing ratio for investment teams.
  • 40% of participant firms have had changes in their ownership structure since inception.
  • 40% of participant firms do not use restrictive covenants for key staff.
  • 60% of participant firms do not have a succession plan.

In discussing survey results, Jon Jodka, the U.S. Head of Prime Brokerage Sales at UBS, noted "While the hedge fund industry grew to more than $2 trillion in assets at its peak, the compensation policies in the industry remained informal in many regards."

On Tuesday, June 23, 2009, UBS hosted the 2009 Hedge Fund Compensation Practices Conference, open exclusively to survey participants. Panelists included Michael Graham and Tom Roth from Grahall Partners and Myron Kaplan and Jason Grunfeld from Kleinberg, Kaplan, Wolff & Cohen. Panelists addressed the survey results as well as current compensation trends in the hedge fund industry. The panel was moderated by Laura Marmorale from UBS Prime Brokerage Sales.

Survey participation was through invitation only, and responses were reported from December 2008 through March 2009. The full survey report is available only to participants.

Myron Kaplan, a founding partner of Kleinberg Kaplan, commented that "A key question to consider when an employee with vested equity departs from a management company is how the circumstances giving rise to his departure, as well as his compliance with any restrictive covenants after the departure, will affect the calculation of his buy-out."

Jason Grunfeld of Kleinberg Kaplan added that "It is extremely important that these types of issues are resolved prior to an employee's departure, which is why we advise our clients to address this in their operating and employment agreements."

A summary of the report for non-participants will be available the week of July 13, 2009. For more information, please contact: Tom Roth, Grahall Partners LLC, (914) 714-2386, tom.roth@grahall.com; Jason Grunfeld, Kleinberg, Kaplan, Wolff & Cohen, P.C., (212) 880-9887; jgrunfeld@kkwc.com; or Laura Marmorale, UBS Prime Brokerage Sales, (212) 713-3555, laura.marmorale@ubs.com.

ABOUT GRAHALL, LLC
Grahall Partners, LLC (http://www.grahall.com) is an intellectual capital firm with deep roots in compensation and total rewards consulting. Grahall's consulting practice has long-standing experience working with alternative asset management firms. The depth and breadth of their Senior Consultants' work with hedge funds is unique in the compensation industry. It includes all aspects of compensation and total rewards design for Partners and employees, including related staffing and firm governance issues.
Online http://www.grahall.com

ABOUT KLEINBERG, KAPLAN, WOLFF & COHEN, P.C.
For over 30 years, Kleinberg Kaplan (http://www.kkwc.com) has been a leader among service providers in the hedge fund industry and has developed a national and international reputation for its representation of hedge funds, including several pioneers in the hedge fund industry. For three consecutive years, Kleinberg Kaplan was included in Alpha Magazine's Top Hedge Fund Service Providers listing. In 2006, Kleinberg Kaplan was named as one of the overall top four U.S. law firms serving hedge fund managers throughout the world, and in 2007 and 2008 it was named as one of the top U.S. law firms that excel at representing hedge fund managers with less than $1 billion under management.
Online http://www.kkwc.com

ABOUT UBS
Headquartered in Zurich and Basel, Switzerland, UBS is one of the world's leading financial firms. It serves a discerning, international client base with its wealth management, investment banking and asset management businesses. In Switzerland, UBS is the market leader in retail and commercial banking.
UBS is present in all major financial centers worldwide. It has offices in over 50 countries, with about 38% of its employees working in the Americas, 34% in Switzerland, 15% in the rest of Europe and 13% in Asia Pacific. UBS employs more than 75,000 people around the world. Its shares are listed on the SIX Swiss Exchange, the New York Stock Exchange (NYSE) and the Tokyo Stock Exchange (TSE).
UBS Prime Brokerage Services offers global clearing, custody, flexible financing solutions, full accounting support, plus access to our foreign exchange and fixed-income platforms. UBS Prime Brokerage Services provides timely settlement and clearing of securities and cash balances for all transactions in more than 60 markets - in any time-zone and all major currencies.

CONTACT INFORMATION
Tom Roth | Grahall Partners LLC | (914) 714-2386 | tom.roth(at)grahall.com

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