Massachusetts Financial Services

Summary/Recommendation

Massachusetts Financial Services’ compensation plan is not compatible with the hedge fund business. Massachusetts Financial Services (MFS) is America’s oldest mutual fund company, who adopts a subjective-evaluation-based compensation policy and faces problem to apply the compensation plan to their hedge fund business.

Supporting Argument

MFS fails to attract and retain its hedge fund managers because of the current reward system. Hedge fund usually generates much higher profits than mutual fund, with higher risk accompanied. Thus, they need high incentive payments based on the fund performance to compensate for the risk. However, MFS’s reward system advocates a strong core value, an “anti-star” philosophy, which ends in low-variance pay for portfolio managers. Obviously, this is not enough to satisfy the hedge fund managers’ requirements. Although managers, who work hard as an excellent team player, are not afraid of taking higher risk to invest because of the enough subjective payment when the market is bearish, they will still complain about a relative lower payment when the market bounces up. Thus the current reward system does not fit hedge funds.

The possible solution is to keep the MFS payment system separate for the hedge fund business. Since the executive managers’ strong willingness to maintain the team playing and anti-star philosophy largely excludes the characteristic of hedge funds, keeping them in MFS is not smart neither for themselves nor MFS.

One possible way is to create a subsidiary business, or to purchase a hedge-fund company as subsidiary, focusing only on hedge funds with a normal “2 and 20” compensation system. Introducing current clients who are interested in hedge funds to the subsidiary is highly recommended because it captures the limited resources and fully applies