Hedge fund Citadel also charges employees full fees to invest in its funds

If you work for a hedge fund you may earn a significant amount of money. If you do, it will almost certainly be skewed away from salary and in favour of your bonus. Hedge funds typically pay their portfolio managers a percentage of their profits. 20% is standard; 30% is sometimes possible. 

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These days, though, most hedge funds don't pay bonuses entirely in cash. Like banks, they defer bonuses over a period of years. When they do, employees are often given the opportunity to invest that money back into the fund. 

The benefits of reinvesting a bonus differ from fund to fund. Earlier this week, Bloomberg reported that some employees at Qube Research and Technologies (QRT) who invest in QRT's own funds are being hit with fees of between 25% and 35% of the fund's profits. Qube didn't respond to a request to comment for this article, but the change is presumably unpopular given that employees there were already complaining about having as much as 75% of their bonuses locked into internal funds and deferred over a three year period. The new fees mean that Qube employees are paying the same performance fee as external investors.

Qube isn't alone in requiring that the employees who in invest in its funds pay full fees. It's understood that Citadel does the same. 

Bloomberg reported last year that Citadel employees have collectively invested $9bn into Citadel's $45bn Wellington Fund, where they're now obliged to leave half their "incentive awards" (bonuses) for a period of three and a half years.  Citadel is thought to charge investors and employees a fee equivalent to 20% of the gains generated by the Wellington Fund in order to align their interests with investors. Parking your money there remains lucrative: last year, the fund was up 15.1%. A Citadel portfolio manager with a $1m bonus invested in the fund will therefore have made an extra $180k in 2024 after fees. 

Being able to invest in the fund you work for is a key consideration for portfolio managers selecting which fund to join. Some multistrategy hedge funds have employee-focused funds. Others allow employees to invest free-range in client funds. Renaissance Technologies' Medallion Fund is the classic example of the former. The Medallion Fund closed to non-employees in 2005 and reportedly generated an annualised return of 39% (even after fees) between 1988 and 2021.  

Speaking off the record, one headhunter said most portfolio managers consider the ability to invest in an employer's funds a distinctive perk of the job. That perk is greater when performance fees aren't levied. The headhunter says most portfolio managers are also given the choice of investing in Treasury Bills so that their eggs aren't all in one basket. Sometimes investing in the fund you work for can backfire. Just ask the former employees of Long Term Capital Management. 

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