Hedge funds face tighter employment market in 2010

Top hedge fund talent will seek high-quality, stable companies in 2010 according to Claude Schwab, head of the US hedge fund practice and a partner at Heidrick & Struggles.

The availability of senior top talent is decreasing as hedge fund investment professionals re-surface at other hedge funds, proprietary trading banks, asset management companies and a host of other destinations including endowments, foundations and family offices.

Heidrick & Struggles’s hedge funds industry trends report, updated through the fourth quarter of 2009, highlighted hedge fund talent and compensation trends for 2009 and gave an industry outlook for 2010.

Veteran hedge fund and markets professionals are also in demand at the US Securities and Exchange Commission (SEC), where an expected increase in government enforcement and the creation of a division of risk, strategy and financial innovation are leading to new hires.

Compensation bidding wars will return, the report forecasted. There will be a significant increase in hiring at most large banks/proprietary trading companies, according to Schwab. “Compensation will not reach levels prior to the summer and fall of 2008,” he noted.

“Assets are coming back to funds, swayed by innovative, more transparent investment products that give more control and liquidity to investors,” he says. “Marketing professionals who can sell these products will be key drivers of this activity as funds gear up for the best fundraising opportunity in two years,” concluded the report.

Despite the number of funds closing in 2008 and 2009, launches exceeded liquidations beginning in the third quarter of 2009 and continued into the last quarter of 2009.

Front office professionals in 2010 should expect to see compensation guarantees return, although this will be coupled with an increase in claw backs and deferrals, said the report.

 “An active hiring market in 2010 will mean that some firms can expect to lose their senior-most talent,” said Schwab. The report identified eight characteristics of companies that are the most vulnerable to talent leaving.

Fund underperformance was the top factor cited in the report. Other factors include a lack of formulaic payouts to portfolio managers, shared portfolios, traditionally centralised structures, companies where trigger-pulling responsibility has been pulled from individual portfolio managers, “placeholder” companies housing talent from funds that shut down, fund with assets under manager of less than $1 billion excluding more recent 2009 start-ups and funds undergoing a significant internal event, such as a merger or acquisition.

The report identified the characteristics of companies from which it will be difficult to pull the top people. “These include firms with strong performance and access to stable, sizeable capital. Other factors keeping talent put include well-run management that provides relative autonomy and a healthy, transparent work environment. And, of course, the best talent will expect lucrative, competitive payout models,” concluded the report.

“It’s very difficult to pull a strong performer from a firm that has all of these factors in place. A true ‘game-changing’ opportunity is what it would take to lure the best professionals from such a firm,” noted Schwab. Examples of game changers include a significant increase in capital allocation, sufficient capital to start one’s own company, the opportunity to build a company and/or be a key part of its succession plan and the opportunity to serve a cause while investing.

“Major endowments, sovereign wealth funds and the SEC made key hires in 2009 where candidates were attracted to the cause or mission associated with the institution as well as the investment opportunity. The year 2010 will see a continuation of this trend,” concluded Schwab.

Heidrick & Struggles surveyed over 400 portfolio managers and studied more than 100 hedge fund companies for the report. The company provides senior-level executive search and leadership consulting services.