13/04/2011 Author: Tony Griffiths

Hire power

Amid the various shifting dynamics that the hedge fund industry has navigated in recent years, the need to attract the best personnel has been a constant. HFMWeek looks at the current hiring trends, and how investors are driving managers’ recruitment needs

Founders, executives, operational staff and star traders. From hedge fund shops to prime brokers, big names at big firms always draw a crowd, and when they move job the industry takes note. The recent merry-go-round at UBS and Merrill Lynch – headlined by Stuart Hendel becoming the latter’s global head of prime brokerage – felt the heat of the spotlight recently, but the interest is endemic of an innate, long-held fascination with recruitment trends.

However, unless you’re a trading floor superstar, generating attention-grabbing P&L, life as a portfolio manager is lived largely below the radar. Which, given the strong link between a given strategy’s overall health and the demand for the traders that specialise in them, is perhaps a little strange. Trends in the industry – be that performance, investor expectations, regulatory impact or general confidence – are reflected in the moves and pay structures of these individuals, just as they are those of the sector’s chief executives.    
 
“Before the crisis there was more money to be deployed than there was managerial talent. The opposite is true now,” said a source at one US-based, multi-billion-dollar manager. “We’ve seen an abundance of managerial talent out there. Getting the right person is still an exacting business though.”   

Methods used to source hedge fund portfolio managers can be as varied and distinct as the skill-sets sought. The founder of Fertilemind Capital, a new US-based boutique, has created a website designed to encourage idea generation among candidates.

A more traditional method is proving successful for $3bn Visium Asset Management, which set up a formal recruiting and assessment process for its global multi-strategy fund and revealed in its 2010 annual letter that it received 400 qualified resumes in just the last quarter of the year. But for those that prefer external assistance, head-hunters are still the primary route.

Among London’s best-known financial head-hunting firms, Carrington Fox has a four-man team that specialises in the recruitment of hedge fund portfolio managers. Sourcing talent for multi-billion-dollar, international firms, usually headquartered in the US, it concentrates on four key strategies: systematic trading, long/short equity, global macro, and fixed income relative value.    

The team has successfully recruited dozens of traders in the last 12 months. As of this week the number of searches in motion stood at 16, half of which are for quants. The remaining eight are mainly divided between fixed income relative value and global macro.

“The core area of demand we’re seeing is on the quant trading side,” says Ade Oyegbite, the team’s senior consultant. “That’s systematic, medium-to-high frequency trading across liquid instruments: cash, equity and particularly futures. FX is growing, as are other FI products, such as interest rates.”

Recent initiatives in the quant space, such as Brevan Howard’s DG Systematic Trading partnership, and Hite Capital and ISAM’s systematic venture, have given the impression of an upward swing. Demand for traders has been strong for a good three years at least, Oyegbite notes, particularly when the investor appetite for risk dropped during the financial crisis and the benefits of certain high-frequency models – with low capital requirements and high potential returns – were magnified.  
        
Michael Goodman, founder of New York-based recruitment firm Long Ridge Partners, believes the case for quants is historical. “High-frequency traders and systematic traders have always been in great demand,” he says. “There have been a number of firms looking for people to develop and trade high-frequency models. They typically have less capital and can have lower volatility.

 “What’s interesting about high-frequency traders, most of them think like technology professionals, not like finance professionals; that can present a challenge for many fund managers in terms of communicating with them.”
Like Carrington, Long Ridge specialises in billion-dollar-plus firms. The focus is on multi-strategy funds however, meaning the strategy range is a little wider. “The strongest demand we’ve seen has been in industrials, including basic materials, metals and mining,” says Goodman. “About a third of our current searches are in this area.”

Demand in general “has not really curtailed over the last three years,” he adds. On top of industrials, Goodman has seen a need for commodity managers, systematic traders and a range of single-sector portfolio personnel, including  technology, media,retail, consumer and real estate. A constant need for long/short equity managers in general is also highlighted.    

At Carrington Fox, where only one of the team’s present 16 search requests is for a long/short equity manager, Oyegbite is less convinced. “There has been less movement in the long/short equity space,” he says. “Equities have suffered over the last 12 months and there has been limited confidence in that area as a result. It remains one of the largest concentrations of managers full stop, but movement over the last 18 months has been reduced.

“In the global macro space there has been a lot more activity recently,” he adds. “We’ve had a lot more demand for those types of profiles from a lot of our clients.”   

Both Oyegbite and Goodman agree that experience has become an increasingly attractive quality of late. Traders that have only made money in 2009 and, to a lesser extent, 2010, are deemed less desirable; firms want to compare the records of managers that have had to deal with the turbulence of 2007 and 2008. “It’s definitely about tenured, seasoned portfolio managers,” says Goodman, “ideally with a track record of longer than three years.”

As ever, good experience and a strong pedigree is something firms are willing to pay for. Based on a snap poll of recruiters, the typical basic salary for a portfolio manager at a hedge fund is estimated at upwards of $150k. It can range, depending on the firm and trader’s pedigree, from $100k to $250k, although Oyegbite has seen seasoned professionals on basics as low as £60k ($98k), albeit with a large cash bonus, while Goodman has seen as high as $300k.   

Unlike Long Ridge, Carrington Fox also sources traders for investment banks, where the crackdown on bankers’ bonuses – resulting in a well-documented shift from cash payouts to share options and deferrals – has pushed basic salaries noticeably higher. Here, Oyegbite explains, pay is far more dependent on a bank’s corporate title structure, which, in turn is dependent on a trader’s experience. Now, the basic salary range at a bank tends to be between £90k ($147k) and £200k ($325k), up around 50% on the pre-crisis range.

This, says Oyegbite, has had a knock-on effect at hedge funds. “In order to be able to attract people from banks, they need to compete on basic salaries. Ultimately it’s hard to sell a guy on a £60K ($98k) basis if he’s already on £120K ($196k) basic.”

The Volcker Rule may conjure images of prop traders out of work and on the job hunt, but Goodman says the recruitment space is yet to feel the effects. “There is much talk about prop traders moving to hedge funds. Although we have seen it, it is not as great as people think; many fund managers don’t believe prop traders are as skilled in risk management or idea generation.”  

In terms of basic salary, strategy is deemed less of a factor than the firm itself. Where strategy does have an effect is in an employee’s grace period. High frequency, systematic traders are afforded less time than some of their discretionary counterparts. No surprise there – the shorter position-holding periods mean a trader’s skill can be ascertained more quickly. While the majority of discretionary funds are unlikely to give a trader more than a year to prove themselves, quant traders can get as low as three months.  
     
According to Oyegbite, grace periods on the discretionary side have remained fairly constant. Established quant managers are similarly set, but some new systematic trading firms, “that perhaps don’t understand the business properly, maybe have shorter time expectations,” he adds. There have been a few cases, he recalls, where it might take a trader weeks just to set up his system and there has been no leeway.

The biggest change in pay for portfolio managers has, of course, been at investment banks in regards to bonuses. What used to be majority cash are now largely deferred – often as high as 70%. “In some cases it was pure cash,” says Oyegbite, “at the European banks in particular.” By all accounts, hedge funds still pay their bonuses in cash. European managers, however, appear to be on borrowed time, with the AIFM Directive and modified Capital Requirements Directive (CRD) – both incorporating remuneration codes built on a deferral system – primed for impact.   

The percentages of P&L that calculate trader bonuses have also remained relatively stable. A typical investment bank structure would see a trader take home 3-8% of the money they generate, says Oyegbite, but is discretionary, depending on the managerial verdict and performance of the overall bank.

At a hedge fund, Goodman believes the bonus range is typically 15-20% of a trader’s P&L, but can be as low as 10% and as high as 50%, usually correlated to firm AuM. For example, a trader running $75m at a smaller firm might be offered a bonus of 50% of his P&L, meaning a 10% return of $7.5m nets $3.75m, while a trader with a book of $500m may only be offered a bonus of 10%, but would still make more on the same P&L percentage.   
 
The main alternative to the personal bonus is the team bonus. A typical example would see a fund’s traders assess signals in the market, share ideas, debate, modify, and implement across the firm. If, as a result, the firm generates substantial profits, it can afford to pay a particularly large bonus to those that attributed towards the successful methods.

Whether a fund offers personal percentages or team bonuses “depends completely on the culture of the firm,” says Oyegbite, and not the strategy. When given the choice, he adds, traders tend to lean towards the personal percentage deal, “because people believe in themselves more than others. If anything, even more people now lean towards a direct percentage deal paid 100% in cash, making hedge funds a far more attractive proposition than before the crisis.”     

As with the change in the industry at large, the impact of the financial crisis on recruitment and pay has been conspicuous but smaller than expected. Nonetheless, for Goodman, the signs are that the legacy will be a positive one. “The firms that are hiring right now are doing it right,” he says. “They’re really paying attention to risk management, hiring people with an eye towards risk and a track record for running money. It has always been the case, but there is more of an emphasis on this now than ever before.”

A NEW APPROACH TO RECRUITMENT
“Hiring traders and analysts in the hedge fund industry is highly problematic as the skill-set is quite eclectic,” says Aram Fuchs, general manager at New York-based Fertilemind Capital.

Fuchs is currently looking to fill two positions at his hedge fund – senior and junior analyst – and has taken a novel approach to recruitment. “The biggest change in terms of hiring took place around 5-7 years, when recruiters began to properly utilise the potential of the internet,” he explains. “So one day while watching Donald Trump’s The Apprentice and glancing through my Facebook feed I had a ‘light bulb’ moment. The industry needs a website that can combine the best of both The Apprentice and Facebook.”

Setting up the website Capitalist Collective, Fuchs invites interested parties to register and then submit stock ideas, either long or short. “Then,” the website explains, “participate in the Capitalist Collective community. Give constructive criticism of the other stock picks.”

At the end, Fuchs will pick the winners, with the senior analyst being offered a position at Fertilemind with a starting salary of $125k and the junior analyst receiving $75k.

“It’s a case of so far so good,” Fuchs reveals. “We’ve had 411 registrants, with four submitting ideas.” Peers with vacancies to fill have also shown an interest, including an equity shop, and, if the site proves a hit, the plan is offer further roles in the future.