Inside hedge fund pay: $10M for a 10 percent return

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It's no secret that people can make a lot of money working in finance. Top hedge and private equity fund chief investment officers can earn several billion dollars in a single year—David Tepper of Appaloosa Management earned an estimated $2.2 billion in 2012, for example.

But reports on big paydays tend to focus on CIOs. What's less explored is how much the No. 2 can make.

A lot.

The executive in charge of running the firm without making investments—usually called the CEO, chief operating officer or president—can expect to haul down between $7 million and $10 million if the fund returns just 10 percent for investors and manages about $5 billion.

That's according to new research from executive search firm Boyden that looked at the compensation of CEOs at hedge funds, business development corporations (a type of private equity fund) and boutique investment banks.

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If performance and assets increase, the pay is even greater, Boyden said, and CEOs can earn $15 million or more.

Traditional hedge CEO compensation has three parts. For the No. 2 at a firm managing $5 billion with a 10 percent return, typical base compensation would be $500,000 to $1 million; a fixed bonus based on the management fee charged to investors of $1 million to $2 million; and an incentive bonus based on the performance of the fund, perhaps $5 million to $10 million but with no cap.

A 10 percent gain isn't rare: The average hedge fund was up 9.21 percent in 2013, according to data from HedgeFund Intelligence.