Heidrick & Struggles surveyed more than 400 portfolio managers (PMs) and studied more than 100 hedge fund firms for the report, providing a comprehensive view of the industry and its talent flows. Highlights of the report include:
* Tight talent inventory: The availability of senior top talent is decreasing as hedge fund investment professionals re-surface at other hedge funds, proprietary trading banks, asset management firms, and a host of other destinations including endowments, foundations, and family offices.
* SEC changes drawing talent: Veteran hedge fund and markets professionals are also in demand at the SEC, where a promise of increasing government enforcement and the creation of a new Division of Risk, Strategy, and Financial Innovation are leading to new hires.
* Compensation bidding wars will return: "The post-TARP brain drain is turning around, with a significant increase in hiring at most large banks/proprietary trading firms," says Mr. Schwab. "But comp will not reach levels prior to the summer and fall of 2008."
* New, "safer" investment vehicles helping to drive asset-building frenzy: "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."
* Re-emergence of seeding funds and boom in new launches: Despite the number of funds closing in '08 and '09, launches exceeded liquidations beginning in 3Q '09 and continuing into 4Q.
* Return of comp guarantees in '10: Front office professionals in 2010 can expect to see compensation guarantees return, although this will be coupled with an increase in clawbacks and deferrals.
"It has been a tremendous turnaround year for hedge fund survivors, marking their best returns in over 10 years," says Claude Schwab, head of the U.S. hedge fund practice and a partner at Heidrick & Struggles. "By November 2009, the industry re-crossed the $2 trillion mark, and this was largely due to performance rather than net inflows."
"But this has been a Pyrrhic victory for the industry as a whole," says Mr. Schwab, who is one of the report's authors. "The fact is that more than 20% of hedge funds shut down in the past two years, with 1,500 liquidations in 2008 and 900 in 2009 – and those firms under $1 billion and underwater are especially vulnerable. This vulnerability will have a direct impact on talent flow in 2010; top talent seeks high-quality, stable firms."
Which funds will lose talent in 2010?
"An active hiring market in 2010 will mean that some firms can expect to lose their senior-most talent," says Mr. Schwab. Through their intensive study of firms and portfolio managers, Heidrick & Struggles was able to identify eight characteristics of firms that are the most vulnerable to talent leaving.
Fund underperformance was the top factor cited in the report. Other factors making firms vulnerable include: a lack of formulaic payouts to PMs; shared portfolios; traditionally centralized structures; firms where trigger-pulling responsibility has been pulled from individual PMs; "placeholder" firms housing talent from funds that shut down; those with lower capital (under $1 billion), except for more recent 2009 startups; and funds undergoing a significant internal event, such as a merger or acquisition.
Which funds are most likely to retain talent in 2010? How can top performers be lured away?
"In addition to spotting the most likely firms from which to recruit talent, we were able to identify the characteristics of firms 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.
"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," says Mr. Schwab. Examples of "game changers" include: a very significant increase in capital allocation; sufficient capital to start one's own firm; the opportunity to build a firm and/or be a key part of the firm's 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."