Q&A: Executive Recruiter Talks Hedge Fund Closures, Hiring Trends

Dec 19 2014 | 7:58am ET

Hedge funds in 2014 have been closing at a rate not seen since the financial crisis. According to HFR, the first half of this year saw 461 funds close. If that pace continues, 2014 will be the worst year for closures since 2009, which saw 1,023 liquidations. Adam L’Esperance, a partner at executive recruiting firm Long Ridge Partners, has noted this trend—his firm specializes in the hedge fund and asset management sectors. FINalternatives senior reporter Mary Campbell spoke to him recently about the effect the closures are having on the industry.

How has the recent spate of hedge fund closures affected compensation and hiring trends?

It has certainly added supply to the market in a variety of areas, but probably not enough to have a material effect on compensation. The real driver of compensation is the profitability of the fund, which is influenced by asset growth and, more acutely, performance. It is important to note that regardless of supply, hedge funds are going to continue looking for the top 10% in the talent pool. The size of this 10% will not be materially affected without major changes to the overall number of experienced hedge fund professionals. Given the net closures versus launches we have seen in the past 12 months, we don’t foresee major changes to the pool.

Has the popularity of new products—separately managed accounts, registered products—had any impact on hiring trends?

We have not seen this much in regards to the increasing demand for separately managed accounts, but we have for registered products as they often require hedge funds and private equity funds to hire specialized sales and product development professionals to effectively distribute the funds. We have noticed an uptick in these highly specialized marketing positions.  Some of the bigger, diversified alternative investment managers who have launched registered products have also hired specific accounting and operations teams to support this business.

Hedge funds continue to launch, even during this difficult period, are there any particular trends you see as to the type of fund that is launching or the type of employee it is seeking?

Most of the excitement has been around the larger equity long/short launches and we have definitely noticed a bias towards relative quality in these start-ups. As the environment has gotten more difficult, the few funds that have launched have done so with a larger capital base ($150 million plus) and lower fixed costs. Equity long/short also happens to be the least cost-intensive strategy to launch, which gives new managers a longer runway to build a track record and get to critical mass. There have been a few corporate and structured credit launches of size but these typically require a larger upfront investment in systems and staff, not to mention the willingness of investors to accept longer lock-ups.

We have witnessed more closures than launches in both macro and commodities, which is mostly attributable to the difficulty of the environment in those respective markets.  Many of these startups reach below the aforementioned top 10% of analysts that established hedge funds are courting. They typically find ample supply of investment professionals willing to join in the early stage, although we often witness a period of high turnover during the growth period, usually as the fund approaches critical mass. This suggests that these hires where made in less than ideal circumstances.

Are there regional differences in hiring trends?

The overall size and aesthetic of the talent pool differs from region to region and this is what drives hiring trends. For instance, in the tri-state area of New York, Connecticut and New Jersey, a fund manager can dictate ultra-specific experience and coverage areas and still have multiple candidates to choose from. London is another location that has enough breadth and depth of talent to provide for this. However, in secondary and tertiary hedge fund markets, one is often forced to hire someone with general investing experience, regardless of sector or asset class specialization. One area where we have noticed a maturation of the labor market is in Asia. Over the past four years, there has been an increased focus on hiring of investment professionals in Asia as investment managers, particularly including hedge funds, look to build experienced teams.

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