Infovest21 White Papers

 With excess people on the market, hedge fund managers reassess expensive talent and adjust expectations Institutionalization of the hedge fund industry, regulation, performance (i.e. whether or not the manager is above or below his high water mark) and assets under management (size and growth) continue to be the main pressures affecting hedge fund managers’ compensation and hiring practices.

Excess talent on the market

“From now until the middle of next year, there will be lot of [talent] movement because of the Volcker role. In addition, many funds aren’t doing well. A lot of [employees] may not receive the best compensation this year or next year. If a manager is double-digit below his high water mark, there will likely be no incentive allocation this year and maybe not next year. A third factor is that certain strategies e.g. quant strategies, that had been doing well, aren’t doing well this year. Each of these factors alone creates increased talent but to have all three happen at once means it should be a good year for hiring,” comments Greg Racz, a principal at Hutchin Hill. It is not easy to raise assets for a new hedge fund. People who might launch a new fund might run into difficulty. Those who started small funds may decide it’s too hard (due to a number of factors such as new regulations) to run a $200-300 million fund. They may decide they will be better off going to a bigger fund or platform, adds Racz.

With excess talent now available on the market, hedge funds managers are reassessing expensive talent and adjusting expectations.

Sales and marketing positions

Recruiters agree that sales and marketing are the positions in strongest demand at hedge funds due to the challenging asset raising environment, the need to retain assets, plus the fact that the sales cycle for institutional investors has increased considerably. Investors are doing more due diligence, more vetting and have slower trigger points.

Third party marketer Mike Finnell, managing partner at Hudson Partners, says, “Assuming a good manager with a decent track record, it takes about a year. You need to send information and set up several meetings. No one has money burning a hole in their pocket to invest quickly. It is a buyer’s market especially if you are representing a manager that is relatively small and they have a long way to go before they hit capacity.”  

Portfolio Managers/Analysts

On the portfolio manager/analyst front, Robin Judson, managing partner and group founder of Robin Judson Partners, says: “Many [large] hedge funds are hiring analysts [in all strategies] who have two years of banking experience followed by one or three years of direct experience. They are in demand because they are not yet too expensive, they don’t have to be trained – only tweaked – and it is easier to figure out if they are going to be a good fit or not. They are not as entrenched in one way of doing things or as expensive as bringing in someone with more experience.” Infrastructure positions There is a growing emphasis on the non-investment side of the hedge fund business.

 Infrastructural positions e.g. operational due diligence are in demand due to the continued institutionalization of the hedge fund industry and impending regulation. Howard Eisen, co-founder and managing director of FletcherBennett, noted that a recent RFP broke down the percentage of decision weighted to several categories. The allocation weighted to operational risk soundness was actually greater than the weight to performance. As mid-size firms build out their infrastructure and expand their compliance efforts to meet the demands of both regulators and clients, these firms are looking to recruit chief compliance officers, chief operating officers, chief technology officers, chief financial officers and other operational executives, adds Eisen.

Funds of funds

At funds of funds, institutional sales and marketing professionals are still very much in demand, says Laurie Thompson, associate principal at Heidrick & Struggles. Jonathan Stadin, president of JR Stadin, agrees. Numerous candidates have recently accepted senior marketing roles at funds of funds of various asset sizes so there is clearly a need for capital raisers with an institutional rolodex Several caveats exist, however. Compensation is more reasonable. One fund of funds executive says he was able to hire a marketer this year at a reasonable price. Whereas there used to be many sales and marketing jobs available, there aren’t so many today. As a result, turnover at funds of funds is not as high as before.

While many established large funds of funds are emphasizing sales and marketing people, one needs to look at the funds of funds’ asset size, launch date, and how it is different from others. Some smaller, medium-sized funds of funds say their emphasis is not on sales and marketing at this point. As it is a chicken-and-egg situation, they need to build their infrastructure and research first. They believe that performance will lead to an inflow of assets.

Operational due diligence continues to be an active area at funds of funds, adds Stadin. “The operational due diligence function was given a bit of boost post Madoff. Since the financial crisis, operational due diligence analysts now have a seat on the investment committee and they can veto investment people,” says Michael Paciullo, global head of operational due diligence at International Asset Management. Michael Beattie, president and chief investment officer of Tradex Global Advisors agrees, saying that post-Madoff, they’ve gone from being trading/performance-focused to operations/valuation focused.

While many say operational due diligence analysts are in high demand, one fund of funds executive says that most funds of funds are not willing to spend money for experienced operational due diligence people but rather junior people. Paciullo agrees: “Operational due diligence is a focus but not necessarily the head role but junior and mid level positions.

Recruiters say some selective research/portfolio management roles are being filled at funds of funds. A repeated theme heard from funds of funds executives is the need to keep the research staff to a minimum.