The intensifying talent war in the hedge fund sector is consolidating the grip of the very largest funds with the deepest pockets on the sector. Smaller hedge funds are struggling to compete prompting concerns that clients will be the long-term losers as the choice of funds available to them dwindles further and faster.
Big players hoover up hedge-fund talent
Bidding war for top traders
Competition for talent among hedge funds is so intense that it’s prompting some to offer paid sabbaticals and huge signing bonuses. Bloomberg recently likened the situation to the bidding war for Premier League football and US sports players. It reported that last year a senior portfolio manager was lured by a major New York fund with more than $120 million in guaranteed payouts, according to a headhunter who said he’d done several deals paying over $50 million. Contracts worth $10 million to $15 million are increasingly becoming common for traders. 1 That’s not far short of the $25 million contract received by recently retired American football star Tom Brady. 2
The bidding wars for top talent reflect boom conditions among the top hedge-fund managers. Robust returns at companies such as Citadel have prompted a surge in assets. Total assets under management for global hedge funds rose from $3.8 trillion in 2020 to $4.8 trillion in 2022, according to data from BarclayHedge. 3 While the industry lost money overall in 2022, the top funds posted stellar returns. Citadel, for example, delivered a 38% gain to investors during a year when stocks and bonds suffered sharp reverses. 4
Strong returns at top fund managers prompt deluge of investor money
The inflow of money, with some hedge funds seeing long waiting lists of investors wanting to join, has given ‘firms leverage over clients to charge many times the traditional 2% management fee and use that for recruitment and retention’, according to Bloomberg. 5 That’s giving funds the means to increase the rewards on offer to existing staff as rivals try to entice them with huge offers.
New launches intensify the competition
New fund launches, including some heavyweights, are exacerbating the bidding war. Major new funds include SurgoCap Partners and Ilex Capital Partners, both with around $1.8 billion in assets. The scale of hedge-fund hiring might pick up significantly in 2024, too, according to efinancialcareers. 6 The website said Millennium co-Chief Investment Officer Bobby Jain was ‘currently assembling something akin to a hedge fund dream team’ in anticipation of launching the largest-ever hedge fund, eclipsing even the $8.5 billion raised by ExodusPoint in 2018.
Money isn’t everything
Hedge funds are taking other measures to attract – and retain – top talent. They’re accelerating payouts to portfolio managers, for example, giving them a greater percentage of the profits they generate during their initial period with the firm. 7
Non-financial incentives include a collaborative culture, help for portfolio managers to build their teams, greater tolerance of explainable trading losses, and the potential to work from home. 8 Some of the big US firms, such as Citadel, have even moved to Florida from northern cities like New York and Chicago, ‘as employees longed for better weather and access to outdoor activities’, states Reuters. As an extra incentive, Florida doesn’t collect state income tax. Reuters added that Citadel executives had expressed concerns about crime in Chicago, where Citadel’s HQ had been located. 9
In order to lock in existing staff, many hedge funds are trying to get staff to sign controversial multi-year non-compete agreements, which can constrain their ability to work at rival funds for a very long time.
The main losers are smaller hedge funds. Not only do they struggle to match the rewards now on offer at the biggest and most successful firms, but they don’t have the resources that only a very large platform can provide, such as risk-management systems and data intelligence. That could lead to a shakeout of the industry that will harm clients in the long run.
1 https://www.bloomberg.com/news/articles/2023-06-01/top-traders-see-120-million-paydays-as-hedge-funds-fight-for-talent
2 https://markets.businessinsider.com/news/funds/hedge-fund-traders-tom-brady-salary-citadel-goldman-job-cuts-2023-2
3 https://www.institutionalinvestor.com/article/2bstowo5tb2vl2optghz4/corner-office/hedge-funds-thrived-in-2022-now-theyre-on-a-hiring-spree
4 https://www.cnbc.com/2023/03/03/griffins-citadel-hedge-fund-is-up-again-in-2023-after-a-record-year.html#:~:text=This%20year's%20gain%20comes%20after,period%20from%202020%20to%202022.
5 https://www.bloomberg.com/news/articles/2023-06-01/top-traders-see-120-million-paydays-as-hedge-funds-fight-for-talent
6 https://www.efinancialcareers.com/news/2023/07/how-to-work-at-a-hedge-fund
7 https://www.institutionalinvestor.com/article/2bstowo5tb2vl2optghz4/corner-office/hedge-funds-thrived-in-2022-now-theyre-on-a-hiring-spree
8 https://www.bloomberg.com/news/articles/2023-06-01/top-traders-see-120-million-paydays-as-hedge-funds-fight-for-talent
9 https://www.reuters.com/business/hedge-fund-citadel-move-headquarters-miami-chicago-2022-06-23/
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