Point72 had been paying its stock pickers a fixed 20% bonus on investment returns regardless of how they performed against broader benchmarks. That meant they could be paid handsomely just for matching a rising market.
Under the new bonus system, Point72 will boost those payouts to as much as 25%, but it will only pay the top bonuses on so-called alpha, industry parlance that roughly translates to investment performance above a market benchmark.
By doing this, he hopes to attract better pickers to his firm (adverse selection). Note that he is measuring excess returns adjusted for the riskiness of the portfolio, i.e., alpha.
Note the link to yesterday's post about how best to tie pay to performance. By using alpha (risk adjusted return), instead of raw return, Cohen is practicing the "informativeness principle," measuring performance using all information about productivity, including information about risk.
While the “pay performance” notion being implemented by Coen may be very attractive for top stock picker, it leaves many good pickers at a disadvantage. The notion of having the best human capital for picking the best performance stocks is not a new process within the “informativeness principle”, in fact many institutions within the financial industry may use the same methodology to ensure the best performance stocks are selected in any risk adjusted type of transaction.
ReplyDeleteIt is interesting to determine how is Cohen trying to achieve this? Perhaps he will ask each of their top selected pickers to show a previous portfolio in which this method was successful or by contacting previous hedgefund firms to identify their past performance. In addition, what would happen to individuals that no longer perform as per Cohen mission, do they simple get fired and replace by other candidates that apply for the role or would Cohen provide them with comprehensive training that would align with new market strategies while trading new stocks? Whichever the choice is, it certainly puts a lot of pressure in those that conduct the day to day trading operations for the firm. While I visited the trading firm in Hartford Connecticut last year, I noticed the level of stress that the stock trader goes thru in the day to day trading routine. To This effect once should ask, is this a healthy process for Cohen employees?
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