Hedge fund Millennium spells out why zombie portfolio managers exist

Getting a portfolio management job at hedge fund Millennium can be a fantastic thing, if you manage to make money there. But if you lose money there, it can be the start of a multi-year period of pain.

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The Wall Street Journal noted at the weekend that Millennium is known for its strict approach to stop losses: if you're down more than 7.5% at Millennium, you're almost certainly out. Other multistrategy funds, like Balyasny Asset Management purport to be more conversational about losses. Citadel, Millennium's key rival, doesn't operate a strict stop-loss strategy either.

However, Millennium's SEC filing highlights that even if you don't make a sufficiently large loss to lose your job at the fund, you'll be at a disadvantage as you remain in your seat. 

The filing states:

If a Portfolio Manager suffers net losses during the year, generally the losses are carried forward and past losses must be made up before performance-based compensation becomes payable in subsequent years...

And then:

Portfolio Managers also receive a salary, which is generally treated as an advance against their profits interest if there are profits (although, for certain Portfolio Managers, instead is treated as an expense of their respective accounts).

In other words, if you make a loss one year at Millennium, you'll have to earn back that loss in additional profit the next year before you can get a bonus. In most cases, you will also need to make sufficient profits to pay for your salary before you receive a bonus. 

Millennium declined to comment on this arrangement. However, headhunters say it's standard in the multistrategy or "pod shop" sector. Trader Brent Donnelly highlighted the issue a few years ago, when he noted that if you lose $10m one year in a bank, you start the next year with a clean slate. In a hedge fund, however, Donnelly noted that you’ll need to make it back next year, plus the cost of your seat, plus the cost of your salary, before you’re eligible for anything extra in the form of a bonus. Worse, you'll be afflicted by what Donnelly described as “the Problem of Percentages:” once you've lost 1%, of a portfolio, "you need to make more than 1% to get back to flat.” 

The Wall Street Journal says 15%-20% of people leave Millennium every year, typically after they've been 'stopped out' by the fund for a loss over 7.5%. But headhunters say all multistrategy funds are also afflicted by so-called "zombie" portfolio managers, who would like to leave but can't. "Another fund will only hire you if you have a good track record," says one headhunter. As a result, portfolio managers with past losses are stuck desperately trying to earn back money to compensate. 

"They either have to claw their way out of their losses or be sacked," says one headhunter. "You get these zombie PMs who are simply clinging on."

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