The early drumbeat on bonuses at fund companies is that they are expected to be higher than last year due to positive returns and high incentive fees. As recruiters see it, numbers compared to last year are spectacular.

Hedge fund employees, however, may not be as lucky. Their bonuses are predicted to be flat or even down compared to last year, experts said.

This year, the methodology for calculating mutual fund portfolio managers' bonuses is more complicated than in the past. "The wild card in bonus pay is that firms are now factoring in long-term performance as well as short-term," said Jeff Ptak, an analyst with Chicago-based Morningstar. Fund companies have typically tied bonuses to short-term performance, and as a result, portfolio managers have been largely able to judge how large their bonuses would be based on how well the economy performed. Following the trading scandals, however, fund companies have tried to normalize and undo emphasis on short-term performance, Ptak said.

Portfolio managers in the large-cap sector, in particular, should receive large bonuses, as large-cap funds have led the market over the past two months. Through Oct. 18, large-cap blend funds are up 9.27% this year, according to Morningstar data. Large-cap value and large-cap blend funds have also done well over the period, returning an average 12.73% and 9.27%, respectively. The only large-cap sector not to fare so well is growth, returning 3.35% year-to-date.

Other positions that may see increased bonuses are those in the compliance and risk management areas. Firms clearly recognize the importance of these roles and want to retain talent, recruiters said. Wholesalers also should expect to see increased bonuses from last year, as their role is evolving and the position is taking on additional responsibilities.

Bonuses for those working in customer service might also be higher than in past years, experts said. Typically, service roles are not compensated as highly as sales roles, but companies are now realizing the need to keep their existing client base and are offering added incentives to staff members who support customers, recruiters said.

On the other hand, hedge fund bonuses are likely to remain flat. During the May decline in the market, hedge funds gave up the bulk of their first quarter gains. "Hedge fund compensation is more challenged now than ever before," said Richard Lipstein, an executive recruiter with Boyden of New York.

The Greenwich-Van Global Hedge Fund Index is up 6.6% year-to-date through Oct. 17, compared to the Standard & Poor's 500 Index's 8.5% and the MSCI World Equity Index's 11.2% gains. However, the year is not over yet, and if the fourth quarter should prove to be strong and hedge funds participate in those profits, the bonus pools could recover, an expert said.

Nonetheless, bonuses for hedge fund portfolio managers who specialize in risk arbitration, special situations and credit funds are predicted to be on the high end, as those funds have bucked the hedge fund trend and have experienced high performance returns, said Michael Goodman, a managing partner with Long Ridge Partners of New York. According to the Greenwich-Van data, convertible arbitrage hedge funds are up an average of 10% this year, special situations are up 7.2% and specialty strategies are up 8.6%.

A surprise might also be in store for analysts who jumped to hedge funds with expectations of making more money. "Analysts are overworked and underpaid at hedge funds," said Les Cater, a veteran recruiter with New York-based Cater Stone. Analysts need to come up with 30 new ideas a week, and they haven't been able to do that, Cater said. "Given the general climate of hedge funds, bonuses won't be much different than last year," he said.

Regardless of hedge funds' weak returns this year, firms will have to pony up cash to retain talent, experts said. "On average, hedge fund results have not been that good, but the market is very competitive, and hedge funds will need to be willing to pay to retain talent," said Alan Johnson, president of compensation consultancy Johnson Associates of New York.

On the whole, however, financial services firms have had a great year, and bonuses for most will be up, said Johnson, who estimates that bonuses at investment banks will rise 15% to 20% from last year.

Over the next six to eight weeks, mutual fund companies and other financial services firms will be preparing employee bonuses, typically informing employees of their rewards in December and dishing out the cash between early January and mid February, with a few waiting till March.

Most mutual fund company employees are expecting increased bonuses from last year. "People are expecting better bonuses than last year, and their expectations will be met," said Dawn Dzurilla, managing director with Dzurilla International of New York. Anyone who performs well and generates alpha will always receive a nice bonus, a recruiter remarked.

"A lot of factors impact how high the bonus pool will be, and they all aligned and clicked this year to push that higher," said Cornelia Kiley, an associate with the recruiting firm Russell Reynolds Associates in New York.

(c) 2006 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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