How a constantly evolving mix of hybrid and remote working, longer notice periods, changing salary structures, incentives, and company culture is potentially retooling hedge fund talent development…
With so much of the hedge fund industry tied to performance, market participants acknowledge it is tricky to identify any discernible salary and compensation trends across the investment and trading functions, particularly this year where dispersion in manager returns has been pronounced. At the same time, the size and significance of the management fee within a traditional hedge fund fee structure is often overlooked, according to some.
Noting how the fee structure-compensation dynamic continues to shape compensation trends, Anthony Keizner, partner at Odyssey Search Partners, says: “When it comes to the ‘two and twenty’ structure, people typically focus on the 20% because it’s more exciting and there’s more volatility there.
“If a firm is up 30% – yes, people typically expect to be paid significantly. But when the firm is down 30%, they don’t think the comp should be as up as it would be when it is up 30%, but it certainly doesn’t go down 30%. It may be flat.”
He continues: “The firm has the ability to pay, through the fees that it generates, and it needs to pay in order to keep those people in the seat when other firms would be looking to poach them. Therefore, you’ll see a much more muted growth in comp this year, but certainly for junior and mid-level people you won’t see a dramatic drop in compensation for any firm that plans to still be in business 2023 and 2024.”
Why?
“Firstly, they are relatively less expensive than the senior people. Secondly, the junior and mid-level people do not see those big swings to the upside that the senior people do, with the understanding that, in return, they are not exposed to the downside in the same way. Thirdly, there is still demand from other firms that have raised capital that want to hire these people.
“So if someone gets the message that they are no longer loved at their firm – a message indicating they’re going to receive 20% less in compensation in 2022 than in ’21, even as inflation is rocketing and there are other firms that are still hiring in the environment, for instance – they assume they are no longer wanted. They’ll be even more disposed to then looking for another firm where they may receive a warmer welcome.”
“The reality is, since Covid, a handful of firms have done very well but most have not. People recognise they are in a performance-based industry and if the firm does well, then they will do well, and there is more money to go around,” says Phillip Chapple, chief operation officer, Moneterone Partners.
“If not, you have to consider what would make them happy in those situations where there isn’t this kind of excess returns to distribute. So I think as an industry I think you’ll probably find that it’s lower than it was pre-pandemic. But there are always some who are doing very well, and always others who are doing less well.”
Defensive
With hedge funds continuing to compete for expertise, notice periods and non-compete periods are reportedly becoming longer, something John Hindley, partner, financial services at Heidrick & Struggles, sees as a “defensive manoeuvre” by certain firms who are growing increasingly frustrated at losing staff.
“From a US perspective, we see that notice periods and non-compete periods are getting longer,” Hindley says, adding that hedge fund management firms want to make it prohibitive for other firms to poach their talent.
“For instance, we have taken people out of organisations in January and they have not been able to start at their new firm until the following September. Even if people aren’t held to that period of time, it means they are forced to be good leavers – they have to negotiate their exit, they have to behave appropriately on the way out. Longer notice periods have the effect of civilising those discussions.”
He adds: “We are also seeing a slight increase in conversations around things like clawbacks, and the clawback of bonuses paid in previous years. It’s not endemic by any means, but we’ve seen it at the banks and it’s something that’s potentially going to leak over into the hedge fund world as just another way to try and retain good talent.”
Rigorous
As the world recovers from the coronavirus pandemic, how the hedge fund industry best approaches the shift towards remote and hybrid working model is emerging as a central component in the recruitment process.
An in-depth study published late last year by the Alternative Investment Management Association and KPMG suggested most hedge fund firms are now moving towards a permanent hybrid working environment following the Covid-19 pandemic Overall, some 79 per cent of those surveyed have now shifted to some form of permanent hybrid working, though the AIMA/KPMG study also flagged potential ongoing challenges surrounding team-building, collaboration and decision-making stemming from the work-from-home model.
“The global pandemic has transformed how and where people can be productive, removing the traditional barriers of physical location and other limiting factors,” says Aaron Steinberg, head of prime service sales and capital introductions at Pershing. “This has created new opportunities for candidates, and an industry need for a number of skillsets, most notably in middle- and back-office roles.”
Adrian Fraenkel, founder and CEO of quant hedge fund manager Varuna Technologies, says his firm’s 100% remote working model offers the advantage of being able to attract investment management talent from all over the world who may otherwise be unable to find relevant opportunities where they are based.
“On the flipside, the main challenge of remote working centres on having less face-to-face time together as a firm, meaning we have to rely heavily on the personal responsibility of each colleague we hire to deliver day-to-day for the firm,” he explains. “We look to counter this by having a rigorous screening process in the recruitment cycle, as well as fostering a culture of training, idea-sharing and, ultimately, accountability.”
Most hedge funds are now “very accepting” of a hybrid work policy, according to John Hindley, who believes it is proving to be a competitive advantage to offer flexibility for firms looking to hire in this market.
“We are seeing that firms are able to attract good talent – and perhaps better talent than they might have been able to attract on a pre-Covid basis – because they offer more flexibility than other organisations,” adds Hindley.
“A lot of people value working from home, and are able to do so quite successfully in certain roles – I’m thinking particularly about fundraisers. Where fundraisers are able to work from home or able to travel, but don’t necessarily need to be in the office Monday through Friday, that’s particularly advantageous.”
Ambitions
Looking ahead, with many of the so-called ‘golden generation’ of managers which drove the expansion of the hedge fund industry and helped it flourish during the late ‘90s and early 2000s now approaching retirement, the question of succession – and how talent grows as businesses mature – is coming into ever-sharper focus.
John Hindley believes the issue of succession relates closely to the culture and the ethos of an organisation.
“A big part of recruitment is who owns the business, what their plans for the business are, whether they’re bringing out new products and strategies, whether there is a proliferation of thought and ideas, whether there’s a commitment to growth,” he says.
“Whenever we are recruiting for an organisation, the very best candidates are always interested to think about not just the job they’re being recruited into, but what the next job might be that they take from there, because people want to progress their careers. When you’re at a senior level, and your chances of doing something different in the short-to-medium term are relatively limited, you need to understand that at least the business is going to be moving in the right direction, even if your particular role within the business is comparatively stable.
“This is very important for senior hires. Many people don’t want to be a fundraiser for a firm that only wants to raise $500 million next year. They want to be at firms which have ambitions to grow. Likewise, you don’t want to be a portfolio manager at a firm that’s only ever going to get to $1 billion if you want to grow to $5 billion.”
Phillip Chapple indicates the challenge of career advancement and succession is particularly acute at the COO level.
“When I look around at the COO community at the moment, we’re all roughly the same age – all of us have been COOs now for probably 15 years plus.
“I think it’s difficult for the generation below to get that COO step-up. When I was in the industry initially, it felt like age 30 was about the level you became a COO. Now it seems to be getting higher and higher, and it’s tougher for the new blood to get in.
“If you are a new manager wanting to start up, do you take the COO who has done it before or do you take someone who’s been the head of ops and promote them?
“Our view was that if you hire people, put them in a role, and there are fewer promotion opportunities because it’s a smaller firm, it’s important for them to feel that they have opportunities to keep learning and are still developing. That’s a huge retention tool for someone who still feels they’re developing, they’re growing, learning, and more importantly, doing what they enjoy on a day-to-day basis.” 
