Hedge funds vying for capital used to differentiate themselves with operational alpha, but these days, checking for operational best practices is a standard part of investor due diligence, making it something that is expected instead of a selling point. Human alpha could become the next big thing according to a report from Citi Prime Finance that found companies who invest in their employees consistently outperform those without such policies.
Human Alpha studies
“Numerous academic studies have demonstrated the connection between superior performance and an organization’s investment in its people,” says the report. Previous studies have shown that companies can increase their value by as much as $40,000 per employee and that IPO firms have a 20% higher survival rate when they invest in their personnel. “What was more interesting — and not as intuitive — was our finding that when institutional-caliber firms (>$500 million AUM) with between 50 and 150 employees were compared head to head, those observing more of the standard and leading practices associated with superior people management posted better investment returns than their peers.” These results held true even when assets under management had been normalized.
Measurement of people’s scores
Citi measured each fund’s ‘people score’ using a set of standard, market-leading personnel policies and found that companies with a high ‘people score,’ had employees that were more committed to their supervisors, more likely to support each other’s work, more willing to take on work outside their job descriptions, and less interested in finding another employer.
Citi thinks the difference in performance is too high to be ignored for long, and that what is currently an advantage of some forward-thinking management teams will become expected, and investors will look for good HR policies as a routine part of due diligence. In the meantime, companies that work hard to help their employees thrive on the job can use those values to bring in savvy investors, especially those who are looking to make long-term investments.
“Discussions about what it takes to establish multigenerational hedge fund firms are already on the rise,” says the report, “and having a robust people management process lies at the heart of this strategy.”
