The Industry
Comments on how firms are structured and PnL seats
Introduction
I think the ways the industry works are very mysterious at times, and by that I mean the quant trading industry (proprietary trading or quantitative hedge funds). I have sat in a PM-like seat multiple times now and thought I’d sit down to talk about the differences in firm structures, how the compensation typically looks, and what are the smart choices to make as a PM.
Index
Introduction
Index
IC vs PM
Compensation
Cost Attributions
External vs. Internal
Final Words
IC vs PM
I think this is one of the biggest differences in how things are setup at firms. There is, of course, a middle ground between these two types of setups but it is a great classifier for thinking about firm structures. These are: IC - individual contributor and PM - portfolio manager.
In individual contributor roles there is much more collaboration and each individual works on improving the business as a whole. It is much more stable as a job since as long as you do your job well you are not very likely to lose that job (doing your job poorly is a different story of course). There is no risk that the PM above you blows up and you lose your job or you simply fail due to some other assortment of reasons despite working hard, and being smart. The base pay is typically higher, but the bonuses and control is much more limited. These are firms like HRT, Jane Street, Jump, XTX, etc where you hear about these staggeringly large compensations, but it is mostly in the form of base and a fairly bounded (both on the up and down side) bonus. Using HRT as an example, their entire codebase is entirely open for all employees and there is no silo-ing between teams. This makes for a great learning environment, and removes one large risk / challenge of being a PM which is knowledge acquisition (if you are never mentored by the right people, and get under a bad PM it is very hard to be a successful PM purely from scratch). On the downside, it also means that your efforts get blended into the efforts of others, and the career progression ladder requires you to be a lot more collaborative. For most of these IC type firms, if you want to move up you need to become management and start running internal teams / becoming a head of some sort of project / division. The kind of PnL tied compensation that happens on the PM side just isn’t do-able without working very closely with many others in these IC roles, and even in this case it will be a discretionary bonus and the effective % you get will be a lot lower than if you were a PM.
For PM structured businesses, you will either be a portfolio manager, sub-PM, or working under a PM (their researcher / developer). The experience here can be wildly different depending on how good of a PM you are or how good the PM you are under is. These are usually the characters you hear about having made 10s or even in some cases hundreds of millions of dollars. The bonuses given by the PM often can also be large for the people working below these successful PMs, but more likely the money made by the people under said successful PM will come from them taking that knowledge the PM has passed on and becoming a PM themselves (hopefully successfully). If they become a PM under the PM (as a sub-PM) then all parties are usually happy and the PM takes some chunk (either explicitly or discretionarily) of the sub-PMs would-be cut if they were a full PM. This is not to say the sub-PM has their own cut - usually they are simply part of the PnL of the main PM (which is how they get their backing in the first place — via the main PM backing them with their own PnL on the line) and as such if the main PM loses a lot of money then there is no PnL cut to pay out to the sub-PM even if they did well.
For PMs, the PnL is often a direct formula, especially in the more pod like shops such as Tower, but in firms like QRT, PMs receive discretionary bonuses in most cases. That said, when it is discretionary there is usually much more communication between teams whereas in some firms such as Tower there is very little communication. In some cases you can get fired for talking to other pods about their book! Millennium is the largest “PM” shop and some of its pods are incredibly large, to the point of being practically their own firm. One of these is WorldQuant (WQ) which is actually a pod inside of Millennium. Within WQ it is structured such that the data team prepares data, researchers engineer features (alphas) and then PMs handle forecasting and portfolio construction, and finally execution teams deal with putting the positions on. In WQ, you can be one of 3 types of PMs:
EQW
Specialist
Independent
EQWs can trade any asset class and this is more senior than specialist; you typically have to work towards this position. Specialists can only trade a very limited range of assets. Independent PMs can trade whatever they want typically and come in with their own infrastructure. They often see a large chunk of the pipeline from data to execution (although not always all of it) unlike the other two types of PMs who will only perform forecasting and portfolio construction. This is just a breakdown of the structure at one firm, every firm has its own structure and most PMs tend to lean more towards the independent PM setup with perhaps some help on execution and data provided but often their own signals. This is also an MFT specific setup, HFT is by definition almost always an independent PM-like setup. Tower however does have a latency team, tooling, and infrastructure provided to PMs (as far as I know for the crypto side) so there is help!
I find IC roles tend to be more for big HFT shops and PM roles tend to lean more MFT. This is the nature of the business: you can’t do equities HFT with a 3 person team, but you can do MFT in equities with a team of that size (provided legal, operations, etc are provided like any normal pod setup). I have seen small teams like this in crypto (and other asset classes) but some types of trading require really large teams to be competitive and there isn’t much bargaining ability for an explicit PnL cut when you have a team that large and with lots of infrastructure. You can’t leave with the team easily and the bargaining chips are gone. If an MFT (or HFT in an asset class where small teams are practical) PM leaves with his researchers and developers below him, short of non-competes, and NDA/IP protections they will still be able to rebuild at a new firm once the garden leave is up.
Compensation
I am not as well positioned to give an idea of what IC roles pay since they vary and I have mostly worked in PM positions, but recruiters often publish reports on industry compensations if you can get your hands on it. I know Selby Jennings has one (although I thought it was quite high, probably for top funds / NYC).
I think it is worth bringing up that most of the industry does NOT get paid 300k+ base salary. This is what Citadel, JS, etc pays, and even then this their top offices where the best talent is. If you are in a smaller office or on a team which does not drive as much PnL for the firm you may get paid less. If you are junior and are at a small or medium firm (non-top tier), you will not break $200,000 (base) a year, and without a very significant amount of PnL being generated there’s a high chance the total compensation remains below this mark. In fact, I have seen firms pay less than $100k base in some rare cases, and in many common cases traders/quants paid $120,000 to $160,000 (TC). There are a lot of people who want to work in the industry afterall. A large part of the industry does not pay these huge sums of money you will see online as base salary. It would be irresponsible I think if I did not mention this.
For PM roles, I’ll cut straight to it. Typical compensation I’ve seen and negotiated around has been $200,000 - $350,000 USD for base compensation, and I have seen it go up to about $500,000 for others. I expect established teams who have consistently made VERY significant PnL have boosted this up much higher, but this is typically a reasonable expectation of compensation (crypto specific). This is a range I have heard from others and have seen in my own career as a common range.
For PnL cuts, SMA deals typically sit in the 20-30% cut range, and PMs get around:
5% at WQ (quite low, but lots of infrastructure and all signals provided)
15-20% at Millennium
10-20% is reasonable for firms like QRT, Point72 etc
Proprietary trading firms pay a lot more:
20-50% is the usual range. I think most offers sit around 25-35% and if you do better you will work up towards 40%, and if you are a top team you will get 50%. It doesn’t go beyond 50% as far as I’ve seen, but I know pods where it is 50/50 their capital and the firm’s capital so the effective cut then rises significantly. Often the charge for running your own capital is 0-20%, some firms offer deals where it’s entirely your own capital and you can use their top fee accounts etc.
Cost Attributions
One of the benefits of being an internal PM at a firm is that you get all your costs paid for you, but they do still come back to you… Costs will be taken out of your PnL or your cut depending on your deal. Often some costs are paid entirely by the firm (this can be only operations/compliance or can go as far as you only paying for your salary - but I’ve never seen someone pay nothing, although I’m sure it has happened for a lucky pod somewhere out there).
The term “draw” is what comes out of your PnL cut and usually refers to your salary, with top of the line (business expenses) expenses coming out of the PnL itself. Costs may include:
Latency Tech (latency line providers like Avellacom, Mckay Brothers, and BSO for HFT pods - crypto specific names)
Servers (research or production servers)
Datasets
Salaries of your team
Operations / Compliance / Legal (often charged as a cost of “hey you pay X for our internal legal/ops team and this is mandatory”) (one of the more likely items to not be charged)
Office costs (sometimes charged on a per seat basis if you are not renting your own office)
This obviously does not apply to IC roles. I find it is almost the opposite way around where IC roles often give very strong benefits (rules like you can expense up to £100+ if you are doing an activity with 2 or more other colleagues which can be things like surfing lessons) whereas PM seats do not need to woo hires with special benefits — it’s eat what you kill, and if you kill a lot you eat a lot (big fat bonus) and if not you starve (get fired).
On the note of getting fired, I have seen some people make it 2 years without making any money before getting fired! But I think after about a year your time is up at most shops, and often you should be aiming to have something making money before 6-9 months since that’s when the heat turns up! Realistically you should at the 3 month mark have something to show for yourself. It will depend on what your setup is and how much infrastructure needs to be built, how desperate the firm is (not ideal), how well you can make up excuses (also not an ideal factor to have to use!), and whether you have come in with prior infrastructure which can speed up deployment time. Your time will eventually run out if you don’t make money as a PM or the PM that you are under doesn’t make money so ideally try to make money! If you are under a PM and they get fired you will either be fired or moved to another team. Depends on the firm, and how well others thought of you. I know great quants who were sub-PMs or researchers under an unsuccessful PM and sadly lost their jobs despite doing everything right on their part.
External v.s. Internal
We have so far talked about internal PMs, but there are also external PMs. It is usually some sort of SMA deal where you get to keep your IP, but they pay you some relatively small base in the form of management fees (they also may not) and they often times will cover your business expenses provided they are not excessive. It is a good deal for the firm because they are paying much less than usual (you will not get away with asking for 100s of thousands in costs, maybe up to 20-50k in costs although good chance it’s even less and then get 2% of the capital under management if they even pay that out). Sometimes, no such costs are covered and you are out of luck, but it is a reasonable setup if you’ve got low costs, some savings to live on, and want to be in a PM seat with full ownership of the IP in the end (which lets you move around with minimal friction and thus ensure your terms are fair / you are not locked in).
Final Words
I hope this was insightful and provided some information to newcomers in this industry or maybe even those who have been in it for a bit. I may write a second part about some other thoughts on this matter if the audience enjoys this article a lot.
Disclaimer: I may be off about one specific firm doing something, things change! but this is written to the best of my knowledge about the industry having worked in it for a fair while in PM-level roles.