How Much Money Do Fund Managers Make?

hey welcome back to the show today we're going to talk about how much fund managers actually make i've actually i've ran our fund for the last four and a half years i have a fam my entire family all runs and works in fun so i've got some a little bit of insider information here but we're going to talk about how much money you can expect to make if you run a 200 million dollar fund a 20 billion dollar fund you and you see guys in the news all the time right you see ray dalio taking home two billion dollars from his fund in one year right think about like the highest paid actor you know hundreds of millions maybe right and then obviously fund managers like tons of fun managers taking home billions of dollars it's wild you see ken griffin shorting gamestop screwing people like us and still taking home fat stacks every year we'll see if we bankrupt them though or whatever but but this is gonna be a fun a fun episode so first thing i wanna talk to you about is actually how fund managers pay is split up now some of you guys might be like bridger lincoln they just have a two and twenty model right it's just two and twenty that's the standard way two percent management fee they get two percent for just managing the fund and then they get twenty percent of the performance or they carried interest yes this is true this is kind of common but let's break out what that actually means i'm going to use an example here but we got a timeline we're going to use zero to a 20 return that a fund has i'll put a 10 right here as well so a lot of funds will set up a benchmark to hit called a pref also known as like a hurdle rate this is the preferential rate of return these are all terms you can use when talking about funds in my fund it's eight percent and what this means is the first eight percent of all returns goes directly to the limited partners the investors so this year our fund did poorly we only made a seven percent return i would actually not make any performance fees all seven percent would go to the investor what about this management fee yeah good question so the management fee is taken right here at the beginning off the top at two percent so yes in that example i still would have made my two percent and the investors would have taken all seven percent but typically fund managers aren't in this business to just make the two percent they're in the business for the next piece which is called carried interest and you'll we'll talk about that just right here so after the eight percent in my fund we do a two percent catch up okay so the ninth and tenth percentile go to the general partner or managing partners it goes to us so if this year we got a ten percent return first eight percent would go to the investors next two percent come to us once we get above a 10 return and this example was 20 we split 80 20. 80 to the limited partners or investors 20 to the general partner so obviously you know you can charge whatever fee structure you want just the 2 and 20 is the most common okay so let's take some actual examples of how this looks if you were running a 200 million dollar fund all right so let's jump into the numbers right so assuming a 2 management fee 2 percent of 200 million four million dollars not a bad paycheck right so four million dollars right off the top goes to the general partnership the managing entity of the fund right now let's assume a 20 return on investment right that this fund whatever it is real estate hedge fund venture capital um they they achieved a 20 return that year and let's assume also that they're paying annual distributions on that so let's kind of do the numbers so 20 on 200 million is 40 million in profits but then we just talked about the 80 20 split between the lps and the gps 20 of that 40 million is another 8 million dollars so just doing a little math right the four million from the management fee and then the eight million dollars from the performance fee gives this fund 12 million dollars in pay that year right and obviously fun sizes differ a lot like if this is a hedge fund a 200 million dollar hedge fund i mean how many employees what like i don't know 10 to 20. depends yeah it really depends not that many though but on a like a real estate fund depending on the assets operating it it might be a lot more people right yeah but still 12 12 million dollars in profits that's a pretty good paycheck to split up right but the reason that the fund model is so lucrative is when you do it at scale all these guys that you see on the top pay charts like ken griffith and jim simons and all of these guys right why they're making so much money is because they have so much money under management right so let's do this same scenario quickly just with a 20 billion dollar fund right so two percent management fee on 20 billion that's 400 million dollars assuming a 20 return on that that's now 4 billion dollars right in performance and then split up on the 80 20 between them you know general partner limited partner is now 800 million in performance fees that the fund is taking so again just a little math here of the 400 and 800 puts you at 1.2 billion dollars in take home for the general direct to the general partnership and again you see a number of hedge funds less than maybe 300 people with 20 billion i mean you not that's not uncommon to see at a big hedge fund imagine 20 billion you'll even see bigger funds uh like kkr or blackstone managing 200 billion that's probably the next next step and just add a zero right to all this the beautiful thing about funds is the scalability is the ability to scale with not a ton of overhead in some cases but the dollars that you make are absolutely absurd of what is crazy right now to make the deal even sweeter for fund managers the irs a number of years ago set out new tax code to incentivize fund managers they wanted fund managers like us to take this risk to go and launch a fund to grab money from international investors pull together and help invest into economies real estate new businesses whatever it is and they gave fund managers an incredibly lucrative tax incentive and down here we wrote carried interest loophole so this this right here this is called carried interest this is the performance fees on fun this is why kids go to stanford or harvard for three five years and they they hope and pray every night that they can make carried interest on a fund because for a few things number one it's so it's big dollar amounts but number two it's taxed at capital gains rates so just as a refresher right so ordinary income is taxed at is 37 for the highest tiered income bracket right that's excluding kind of state that's just federal taxes if you're in california you're probably paying around 50 total if you're making that kind of money yeah yep so and people hate taxes especially the affluent right so 37 on ordinary income capital gains is taxed at either 15 or 20 so that's like a 20 bonus right on top of any sort of money that you're making so not the management fee management fees tax debt ordinary income um once you know it's dispersed through ever all the partners usually pays the rent and everything there it's over any income yeah but this this is taxes capital gains which is huge right and i hate the word loophole i mean it's a tax incentive they've incentivized as fund managers to do this right so you'll start to hear if you start listening cnbc other news outlets they'll talk about carried interests with fund managers how they're making so much money and how it's terrible but you know that's how they wrote the tax code now donald trump recently changed this for fund managers i believe he upped it depends on the sector you're in if it depends if you're in venture or real estate whatever you're doing up to 25 and you have to change long-term capital gains you have to hold these investments for over three years to activate these long-term capital gains rates here but that that's the reason guys on on the news donald trump or mitt romney don't want to share their tax returns these guys have ran funds for a long time they've been making carried interest money and been paying a lot less in taxes especially if you're doing real estate you can then depreciate the assets inside of your fund and you're paying even less it's crazy what you can do with a real estate fund especially with taxes it's pretty wild yep and if that's not like enough there's one other factor that we wanted to talk about of why these people are making so much money right of why just these stupid amounts of dollars and it's because they're actually pretty smart so if you look at this graph on the screen it's going to show you the top earners of 2020. it's specifically in hedge funds right all fund managers across different asset classes make a lot of money right but this is exclusively hedge funds and it kind of separates the money they made from just the fund and then money they made from their own investments because we talk about that 80 20 split right so these guys will then when you're making a million a couple million dollars a year you have a lot of excess money and instead of going and just spending it all a lot of them are very prudent and smart right and they'll go and take that money and put it into their fund as limited partners right so they're kind of a gp and an lp in the same fund and then they're making that 80 instead of the 20. so they make money in three ways they make money through a management fee they make money through carried interest and they make money as an investor into their own funds and typically they don't have to pay the other because they're managing their own money they typically don't even pay a management fee or carried interest to the general partner because they're also a gender partner they get an exclusion from that yeah so a lot of things going in your favor but guys let's be honest starting a fund is not easy and being an excellent investor being able to provide that 20 return every year that is not easy right it takes a lot of skill right you need to be an expert so i would say it's well earned it yeah i would say it's well ended as well and especially in hedge funds i mean those guys are doing incredible things depends on different industries and sectors uh but also we've seen a number of people in our groups and communities doing this this isn't out of your scope or reach i've ran our fund for about four and a half years of a number of people that have ran funds or syndicates doing this right now that are regular people like me and you and so that's why we kind of have this this wall street rebel movement you can see our shirts and stuff below we've got links and all sorts of training and stuff that we actually help teach people how funds work how they run the whole nine yards because this is the most lucrative game on the planet and if you can figure it it doesn't matter if you can figure it out in a year great if you can figure out in five years great if you can figure out in 15 years 10 20. great who cares right this is not a get rich quick scheme this is get rich in the long run and get really rich by following one of the most lucrative vehicles on the planet you can see why this is so amazing it's been amazing in my life and and i my my dad runs the fun my brother is a fun uh lawyer and works at number of funds and it's a lot of money floating around um funds are incredibly lucrative and you can see why fund managers are taking the cake year after year it's pretty impressive

Channel: Bridger Pennington

Views: 23,451

Keywords: fund manager, fund manager salary, how much money do fund managers make, hedge fund manager salary, investment fund secrets, Bridger Pennington, how private equity funds make money, hedge funds, private equity, venture capital, how venture capital makes money

Id: YMQvmLmKJGs

Length: 11min 12sec (672 seconds)

Published: Fri Mar 26 2021