Hedge Fund Talent – Hedge funds are constantly jockeying for position to not only generate alpha for their clients but also post returns that are the highest as possible relative to those of their competitors. A big piece of the puzzle in this area is having the right talent, and competition in the hedge fund industry has been climbing as finding enough talented portfolio managers to fill the growing need is becoming harder and harder.
So where are hedge funds finding their talent these days, and how are they retaining their best employees? Barclays’ Strategic Consulting team put together a report entitled “The Right Stuff: Trends and practices in talent management at Hedge Funds” to answer these questions and more.
Sell-side drying up as a source of talent for Hedge Fund talent
Hedge funds of all sizes have been watching their assets grow steadily in recent years, so they simply need more talented people. Traditionally, they’ve gobbled up the best analysts from sell-side banks, but they’re having to look elsewhere for talent because according to Barclays, the sell-side faces a challenge in attracting talent “because it no longer appears to occupy a preeminent position in new graduates’ minds as they think about career opportunities.” As a result, recruitment on the sell-side is now much smaller than it once was.
Historically, the Chinese market has been relatively isolated from international investors, but much is changing there now, making China virtually impossible for the diversified investor to ignore. Earlier this year, CNBC pointed to signs that Chinese regulators may start easing up on their scrutiny of companies after months of clamping down on tech firms. That Read More
Recently we’ve seen a trend of major technology companies stealing the best analysts and financial experts from major banks and firms. One of the more high-profile moves from Wall Street to Silicon Valley was Google’s hiring of former Morgan Stanley Chief Financial Officer Ruth Porat, who has had significant positive impacts already in her time there. As such, the top talent from Ph.D. programs and universities are more interested in taking a job with a tech firm than with a sell-side bank or hedge fund.
The Millennial generation, which now makes up approximately one-third of hedge fund employees, according to Barclays, is pressuring firms to look at their hiring and retention practices because of their greater interest in working at a tech company. As a result, hedge funds are having to make adjustments to their HR policies to target them toward the wants and needs of the generation.
A dearth of candidates
Barclays reports that about 75,000 people currently work directly within the hedge fund industry. Here’s a look at the approximate distribution by position type:
Headcount has increased at about the same pace of assets at around a 10% compound annual growth rate over the last eight years.
The firm reports that approximately half of the hires in investment and distribution at hedge funds are from other funds, but only about 15% of the hires come from either a business or infrastructure.
Another problem is that the class sizes for capital markets, sales, and trading positions are falling, which means there simply aren’t enough people being trained for roles in trading or risk-taking. As a result, hedge funds just aren’t finding enough people with the qualifications necessary to fill their positions.
Where are hedge funds acquiring their talent?
The Barclays team estimates that over the last 12 months, hedge funds have hired approximately 15,000 employees from various sources. They said the preference is to hire through internal networks first, but they estimate that almost half of the industry’s hires come from recruitment firms. Also they have found that more and more firms are creating referral programs for their employees to cut costs and improve retention rates.
In terms of what type of strategy firms are using to find their hires, Barclays found that while some firms “farm,” others usually “poach” from other firms. The type of strategy each firm follows depends on what time of strategy the fund follows.
There’s also a disparity in the number of women who are filling investment positions. About 25% to 30% of the headcount at hedge funds consists of women, but only 5% of them are in investment roles while the rest of them are in either distribution or administrative positions, according to Barclays.
Hedge Fund Talent – Replacing employees is expensive
The firm also found that it’s quite expensive for hedge funds to replace their employees, as it costs about $100,000 to $250,000 to do it on average, making retention extremely important.
Further, Barclays found hedge funds focusing on four main areas for retention: customized learning, community, care infrastructure, and support for causes.
A fifth area of significance is compensation. Promotions do not play a significant role in retention because many hedge funds have a flat structure which makes it difficult for employees to become partners.
The search for talent is skewed toward mid-sized and large hedge funds and multi-manager or multi-strategy funds:
As such, employees in these positions at these types of firms have significant leverage in negotiations. Senior investment professionals at mid- to large-sized hedge funds and senior distribution and infrastructure heads particularly have leverage, and as a result, they have seen the highest increases in average total compensation.
All graphs and charts in this article are courtesy Barclays.