How Much Do Fund Managers Make?: Wall Street’s Highest Earners

Chris Hohn, $2.9 billion. Izzy Englander, $2.8 billion. Ken Griffin, $2.6 billion. David Tepper, $1.2 billion. They made last year running investment funds. So how much do fund managers make? Let's break it down. Funds generally use a general partner limited partnership structure. The general partner, this is the fund managers are here, and the limited partnership or the fund is where all the money comes in. So What these guys do is they aggregate capital from limited partners or investors. Investors put money into the fund and the fund goes in typically buys assets or investments, okay? This could be— and we're going to use a couple examples. This could be a real estate fund, it could be in crypto, it could be a hedge fund which is buying like equities or stocks and bonds. Could be doing venture capital and investing in early startups. And the example previously, those were all hedge fund managers. They're playing the public markets, okay? Okay, so we can follow that example if we'd like. But they invest. Whenever that investment makes money, it flows back to the fund and then gets split between the limited partners, the investors, and the managers. We just have a pool of money, we make investments. Whenever the investments make money, we split the returns. It's not that complex. We've now helped hundreds of people launch these funds. I currently run 2 8-figure funds right now. I'm telling you, it's— yes, it takes a lot of work, it's hard, but it's not that complex as you think. Now these fees, or this over here, what's paid to the general partner is split up generally in 2 categories. Category number 1 is what's called management fees. Category number 2 is what they call performance fees, or other people will call carried interest. Now generally, these are in a basic fund, they call it a 2 and 20. So you'll see this out there, you'll see like a 2 and 20. What that means is a 2% management fee and an 80/20 split on performance. So 80% goes to the investors, 20% comes to the fund managers. So let's just do a simple 80/20 split. Just run some math on a billion-dollar fund. Okay, let's say our fund did well this year. We were, you know, we did awesome. Our fund produced a 22% return After our management fees. So, first off, let's just do this. Let's break it down here. We have a billion-dollar fund. Let's do management fees first. That would be $20 million earned in a management fee. Hey, that's not too bad, right? We'll take— I'll take a $20 mil. But really, management fees is kind of the smaller piece of the puzzle because what everyone goes to Harvard and Stanford for and works their guts out is to get some of the carried interest. 'Cause I'll show you why in a second. If in this example, the fund did a 22% return after fees, that means the fund went from $1 billion to $1.22 billion, okay? That's what we did in a year, meaning we had a gain of $220 million. That's the gain. We're gonna now split this 80— 20. 20. When you split that up, this turns out to be $176 million that is going to investors. Okay. And to the fund, that's $44 million goes to the fund. Not too bad. You like my little squat there? Hopefully it's looking good. Okay. So we've got $176 million. That means the return for an investor would have been 17.6% net rate of return or their net take-home. Now the fund produced a 22, but after all the fees, they're down to 17.6, which is still a pretty decent return. The fund by its together did $20 million in management fees plus $44 million here, which is a total of $64 million. The fund managers made this year. Now, I know you're adding this up together. Again, this is after fees. It's a 22% return after management fees. That's that gap there. So, not too bad. You're running a billion-dollar fund. You made $64 million in 1 year. And guess what? The same thing can happen the next year and the next year. Now, if performance drops, then it goes down or it can get clawed back. But if performance goes up, that number keeps going up. The other cool thing about these funds, they don't take, depending on the fund, that many people to manage it. In a hedge fund, you're talking a dozen people, 2 dozen people sometimes. Now, some funds are bigger, some funds are smaller, but it's relatively small staff. I think the average stats are per employee at a hedge fund is making roughly $8 to $10 million in aggregate for the business. Per employee. Ken Griffin, I showed you before, he's got roughly 400 employees and they manage not $1 billion. I think they manage roughly $80-something billion right now. 80 times bigger than this. It's not too bad. So again, this is a game you want to be in. But let's talk about a few other nuances in these businesses. Now, the example we just used was on $1 billion of capital raised. Now, if you're doing, for example, like a real estate fund or other funds, a lot of times you can get good leverage on that. So if you raise $1 billion, that means you can go borrow, I don't know, maybe up to another billion, another $2 billion. Most funds will do something like this. If you raised $1 billion, you'd end up with $2.5 billion of AUM, or that stands for assets under management or purchasing power. So it's just like a mortgage. If you had $1 billion of capital in a real estate fund, that would allow you to go buy $2.5 billion of assets, which even makes you even bigger, right? You add leverage. Now with that, you got to pay the difference on, you know, $1.5 billion of debt service. And maybe that's at, I don't know, a 5% interest rate or something or a 4% interest rate, whatever it is. And you pay that debt service as part of the expenses in the fund. Some funds can get crazy and sometimes they blow up when they add way too much leverage. They can, you know, go from $1 billion to $7 billion or $8 billion or $10 billion if they're really like a very high leverage firm. Generally, that's a decent, you know, healthy level of leverage. Now, we just talked about the 80/20 split, right? A lot of firms do something a little more complicated than that. Let me explain it to you right here. So I'm going to draw a timeline here all the way out. And this is a timeline of return. So really not timeline, but more of return percentages. So here we have 0% return. In the middle, we have a 10% return. And up here, let's call this a 20% return. All right. Now, previously we just said, hey, everything's just a straight 80/20 split. Well, oftentimes they'll do something a little more nuanced than that. For example, many funds will do what's called a preferential rate of return or a pref. A lot of funds will do it around, you know, 8%. It's also been called a hurdle rate as well. Well, how this works is what we tell investors. We'll say, hey, the first 8% of all returns It's not 80/20. It actually goes to you. It's a pref or a preference rate of return. It goes to the investor. So if this year, if we only get like a 7% return, kind of dismal, well, guess what? We don't make— there's no split for us, no performance fees. We only just get our management fee and you take the whole 7%. Above the pref, we'll do something called a catch-up. This catches up the fund. And let's just for simple math here, let's call it the next 2 percentiles, the 9th and 10th percentiles would go to the GP so that by the time we hit a 10% return, we're back to an 80/20 split. Does that make sense? So again, the first 8% goes as a pref to the investors. The next 2 percentiles go to the GP. And then what we'd say there is, hey, above 10%, then it's, you know, just straight 80/20. Some firms though do 70/30. Some firms do 85/15. Some firms do, hey, from 10 to 20, it's, you know, 85/15 here. And then above 20, we do, yeah, I don't know, a 90/10 or a 70/30 or whatever. They change how they go depending on performance of the fund. Is this making sense? Hopefully this is making you more of an informed investor too when you're looking at funds to invest in. Another thing I'll add, many asset buying funds, a real estate fund, they're going to go buy real estate or a private equity fund. They're going to go buy privately held businesses. They'll do sometimes an acquisition or a disposition fee. All that means is they have their normal waterfall, and then what they say is, "Hey, when we buy an asset, hey, we went and bought this huge company. We're going to charge an additional." I'm going to put it up here. Plus one percent acquisition fee, or when we sell the property, we're going to charge a one percent disposition fee. When we're disposing of the asset. Okay. These are all different fees and things that they add in. Make sure you're aware of them. One of the things I'm going to add, okay, on this fees, you don't want to get fee to death. You want to be very, very clear. When I'm investing in funds, I've invested— I run 2 funds and I've invested in a number of funds. I always make sure I understand their fee structure. And I want to make sure I understand it in depth. How are you guys making money? Tell me. I ask, tell me every single way You make money. Well, we have— yeah, we have an acquisition fee. We have a catch-up. We have carried interest. Oh, and by the way, I really want to ask him, my brother-in-law owns the side business that we're also working with. Oh, okay. Are you getting paid by your brother? Like, I want to know if there's conflicts of interest. This is why an audit will help on these funds. Third-party administrators help with this too. Additionally, something to note, I have seen most funds don't do this, but I've seen some funds pitch this. So this is $1 billion capital raised, right? And this was with leverage. I have seen some funds out there and I don't think it's right, but they say, hey, it's a— yeah, we charge a 2% management fee. Remember that? 2% management fee. And you've got to ask, wait, is it on the— you have to read their docs. Is it on the $2.5 billion or is it on the $1 billion of capital raised? Now it should— standard is $1 billion of capital raised, which makes sense. Some funds do it on the full AUM, which I think is a little bit unethical, but they do it. So be aware of this. So for example, if you put in $500,000 and they say it's on the whole AUM, you're not paying a 2% management fee. You're paying 2% plus the leverage they put on. So in this example, you'd be paying roughly, if my math's correct, 2.5 times bigger management fee. That would be a 5% management fee. So be aware of that. If you're looking at funds, you're actually getting— if they're doing this, you're actually getting charged a 5% management fee if they're charging fees on the full thing. Now, standard is to not do that. Standard is to charge it here. Now, additionally, some funds are closed-ended. So like, for example, let's take a private equity fund. They're going to say, hey, our fund is, you know, hopefully 8 years long and we're going to buy some businesses and this is how it's going to work. So we're raising money right now. We're going to raise money. For the first year. Then we're going to start deploying the money in a deployment period. We're going to start deploying capital here, here, here, and here. Then we're going to season these assets and we hope to start selling them. You know, I'm going to do here, here, and here. We'll sell these same assets, okay, in a disposition period. And we plan to be completely exited of all of our assets by year 8. Now, if there's a huge recession or something, we can hold the assets until year 10. But by year 10, we'll have the money paid back to you. Okay, that sounds pretty good. And we're going to charge a 2% management fee, fee, and we're going to do 80/20 split with a pref and, you know, an acquisition fee. Okay. So just to be aware, again, when they go through, they're going to start doing this. When they acquire a property, they're going to start— they're going to have an acquisition fee on each one of these. Additionally, what they should be doing is Your money right here, they're raising it there. They're not deploying it yet. So if you've if you've put in, let's just use $100,000, and you you sign the docs, the money's not in the in the business yet. They find their first asset and they go, "Hey, we're going to call down 15% of the capital." So they send you a capital call. You would send in $15,000, right? 15%. The management fees only start. Then and only on the money they manage of $15,000. Make sure they're doing that. Some funds I've seen try to do wonky stuff. It should be once the money comes in, that's the— and that's what's being charged. And then they find their next asset and they call down another 10%. So they call down another $10,000. So now you have a total of $25,000. Management fees again would begin only when the money is called and being worked on. And typically management fees are charged, if it's 2% a year, they're charged 0.5% per quarter. That is very standard for management fees. So your money comes in, the next quarter we're gonna charge you 0.5% per quarter to have your money in. And slowly they're gonna call all your capital. And so you're not, you're getting feed kind of at different times. It saves you and helps you. Additionally, after they have disposed of the assets here, they start selling it, your management fee falls off. A lot of funds by year 5, they say, hey, we're not, you know, we don't need to charge a management fee anymore. We're going to have it fall off or trail off. Or year 7, year 8, as we sell property, we're not going to charge a fee anymore. Okay. So be very clear with this. This is something crucial I want you to know. I've seen a bunch of funds come out recently that have— they pitch a 2% management fee, 80/20 split. But then in their docs, in the little subtitles, they say, well, this is a 2% fee over 10 years, and it's guaranteed 10 years from today through the end. It doesn't start— it doesn't do what I talked about. Additionally, we're going to charge that whole management fee upfront. And so what they do is they say 2% times 10 years is 20%. And we're going to charge it today. You're prepaying your management fees. So you put in $100,000. You thought you put in $100,000. You actually only put in $80,000 because the $20,000 they took and put it right into their, their own pockets, which I think is super unethical and not good to do. You should not do this in your fund. And I've met a lot of investors, they had no clue. Or somebody will say, no, it's not 10 years, it's 5 years. So we'll take a 10% pref upfront for just putting the deal together. Oh, and then we're gonna charge an acquisition fee, and then we're gonna charge 20% carried interest. I mean, it's bonkers to do. Like, investing is hard enough. If you take a 20% fee upfront at $80 grand, you've gotta get, I think the math is roughly a 24% return. Now, this is with smaller funds, guys that are, they don't really know what they're doing. They'll put stuff like this together. So be very careful. If your brother-in-law comes pitches you something something, make sure you understand the fees. Okay? Now, this, what I just described to you, is not common in big funds. In big funds, they're doing what we talked about over here. You know, pretty standard. They're doing a waterfall, pref, catch-up. They've got audits, third-party administrator, all that kind of stuff that they are doing. I also want to explain to you what is a high-water mark. This is very crucial, especially make sure this is in the documents when you're investing in a fund. How this works Let's say this is your investment here, and it started here, and the fund's crushing it. We're doing well. So the fund goes up. Oh man, we made money. Fund goes up again. We made money. Okay, now we're gonna do an 80/20 split, right? And so the managers are gonna get paid. Okay, that's totally fine. That's what we agreed to. Totally good. But then the fund crashes. No, no. Boom. All the way down. And this is zero right here. Zero percent return. It's now negative. Okay, the fund went negative. Ah, crap. Okay, so no management— no, there's still a management fee but no performance fees. Okay, but then like you can see here, the fund takes off again and goes back up and they want to charge— oh yeah, we're crushing it— another 80/20 split. If you don't have a high watermark, what would happen is you got feed from here to here, 80/20, they went down, and then they're going to charge you another fee from going here to here. 80/20. Does that make sense? What a high watermark does is this. I'm gonna put it in red. It goes like this. It is a water— it's a high watermark, meaning, hey, you've already charged 80/20 for this piece right here. So you don't— fund manager, you don't get any new money until you're here to here. That's already been paid for, right? Only if you exceed what you've previously done, then and only then, you make money. Does that make sense? Then you can charge your, you would charge your 80/20 only on this category here that has not been feed in the past. See what I'm saying? Same thing would happen here. If it went down, again, this would set a new high watermark. So you charge that feed, now we have a new high watermark. The fund goes down, it comes up a little bit, there's no fees here at all. For performance. Only once they hit the new high watermark again, then they can get fees again. Okay. Very standard in big funds. Small funds sometimes don't know about this. Make sure they have this in the docs that you're not getting double feed across the board. And if you have more questions about this, go check out our 5 Most Common Questions Investors Should Ask Fund Managers video. It's linked above and below this video.