Compliance
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The Hedge Fund CCO: Commanding Respect in a World of Outsize Compensation
September 1, 2005
With the requirement for hedge fund adviser registration set to go into effect next February, trends are beginning to emerge in how advisers handle the critical task of designating a chief compliance officer (CCO). Early reports are that while CCOs most likely won't participate in the hedge fund incentive compensation schemes that are giving rise to an unprecedented upsurge of wealth, they are still being paid at levels that any Wall Street executive would find respectable.
"On an hourly basis, part-time CCOs are commanding fees that run $500 an hour," says Charles Crow, partner in Crow & Associates, a law firm in Princeton, N.J. that represents hedge funds and investment advisers. He adds that full-time hedge fund CCOs are earning salary-plus-bonus packages "in the $500,000 range" at the high end.
Stephanie Pries, vice president and senior legal counsel at the Managed Funds Association, the main hedge fund trade group, says the going rate for a hedge fund CCO is between $250,000 and $400,000 a year. That's considerably higher than CCOs at mutual funds, whose average annual compensation runs well under $200,000, according to a salary survey from the Securities Industry Association.
Now consider that according to Institutional Investor's 2005 ranking, the ten best-paid hedge fund managers took home between $205 million (tenth-ranked Israel Englander of Millenium Partners) and a staggering $1.02 billion (top-ranked Edward Lampert of ESL Investments). To qualify for the top 25 list, a hedge fund manager had to be making at least $100 million a year--wealth beyond the reach of all but a select few.
The question is therefore raised: With outsize compensation the norm, how will the lowly CCO command respect in a culture where profit is everything and, until recently, regulation was an alien concept?
"It is much more difficult [to be a CCO] when you have the disparity in income," concedes one newly minted compliance officer. "[Hedge funds] are profit-driven, and ... the delegation of power comes from the top. If [the CCO function] is not taken seriously, then it won't get done right."
According to the Investment Advisers Act, which is the template for the hedge fund registration requirement, CCOs do not need to be attorneys, nor do they need securities licenses such as a Series 7. But the Securities and Exchange Commission has said that a CCO should be knowledgeable in securities and should be sufficiently senior so that if they confront management with an issue, the matter will be taken seriously.
"The CCO has got to be an important person in the organization," says Crow. "From the overactive greed gland' standpoint, the interests [of highly compensated hedge fund managers] are best served by being compliant with all appropriate regulations. If you are making over $1 million, you probably want that to continue."
Crow says that from what he has observed so far, large hedge funds are hiring dedicated CCOs from outside; smaller ones "have typically moved someone from the general counsel's office into that role."
So is the new CCO--whether a lawyer or a compliance professional--likely to be cowering in a corner under the disapproving eye of gunslinging, risk-taking, seven-figure-earning managers and traders?
Not at all, and the reason is simple. "The overriding thing is that the CCOs are the ones who communicate with regulators, and senior management would see as a risk the possibility that the hedge fund could be shut down," says one CCO.
