Hedge Fund Hiring and Talent Shift in Anticipation of Regulatory Change

New Heidrick & Struggles Hedge Fund Industry Trends Report for Q1/Q2 2010


CHICAGO, July 27, 2010 (GLOBE NEWSWIRE) -- "The hedge fund industry is turning on its head – with regulatory and distribution pattern changes having a big impact on talent in the sector," says Daniel Edwards, an author of the Heidrick & Struggles International, Inc. (Nasdaq:HSII) Hedge Fund Industry Trends report for Q1 and Q2 2010, which was released today.

"Huge anticipation around regulations including the Volcker Rule will have ramifications for the rest of 2010 and beyond," says Mr. Edwards, Global Head of Financial Services and U.S. Hedge Fund Sector Leader with Heidrick & Struggles.

The report examines hedge fund talent trends as the sector recovers from 2008, even as current market instabilities threaten some of the growth. The report's authors also identify industry-changing factors, such as the Volcker Rule, that will affect hiring not only over the coming months, but for years to come.

"The first half of 2010 saw a much healthier hiring market than last year, but there remain a lot of fresh wounds from 2008 that have re-opened during the recent bearish trends," says Chad Astmann, the head of Heidrick & Struggles' North American Asset Management Practice and a co-author of the report. "Money is flowing into funds – but cautiously. We are already seeing a shift in where talent is needed, and where it is landing."

What have been the top trends for 2010 so far?

Highlights from the report include:

  • Fewer options for top talent: "Despite an early-year flurry of activity, there has been a reduction in truly viable destinations for hedge fund talent," says Mr. Astmann. "While at one time professionals had a universe of literally hundreds of firms, this is really down to about 25-30 strong options today. Many options – such as the prop desk or noninstitutional hedge funds – are simply becoming less attractive."
  • Flight to quality: "Related to this, top talent will continue to seek high-quality, stable firms," says Mr. Astmann. "Firms below the $500 million mark and with capital-raising difficulties are those most susceptible to talent departures."
  • "Loose talent" being sought to incubate funds: More traditional asset managers are still looking to build hedge fund capability, and one of the key ways they can do this is through hiring talent that's been displaced by the instability in the sector. "However, these incubation opportunities for talent are somewhat limited given the uncertainties in the market," Mr. Astmann explains.
  • Shift in power toward the investor: The battle for pension and institutional investors who have a renewed appetite for alternatives has shifted power these groups. "Their demands for more liquidity and more visibility into a fund's investment process are being taken far more seriously," says Mr. Edwards. "Funds have to hire toward these needs."
  • Due diligence in hiring: "To comply with investor demands, fund managers are conducting greater due diligence in the hiring process – how has the candidate managed risk?" observes Mr. Edwards.
  • Relationships wanted: "The most sought-after players in the industry are the ones with established relationships with the major institutional investors, such as pension managers, who can bring in the assets," says Mr. Astmann.
  • Mid-level talent losing out: Very senior-level and very junior-level talent have been the focus of hiring, leaving mid-level candidates in low demand, except for those with specific skills or experience such as a sector focus. "Pre-MBA hiring has also been strong," Mr. Astmann says, "adding further credence to the need for strong junior talent who focus on modeling potential investments."
  • Continued sector consolidation: The past year has seen ongoing movement toward large institutional players, with ongoing hedge fund closures and a higher barrier to entry for new launches.

What is the outlook for the rest of 2010 – and beyond?

"The most significant impact on the industry is the Volcker Rule which has just passed the House and Senate. As firms move from the self-regulatory phase that was the immediate result of the financial crisis to the government-mandated phase of regulation that we are entering now, there is great uncertainty about how the regulatory impact will actually play out," says Mr. Edwards. From a talent movement perspective, there seem to be two general camps. One group clearly prefers the relative certainty of the independent hedge fund platform despite the increased regulatory impact and are moving away from bank-affiliated entities accordingly. An alternative view holds that no sudden moves are necessary, as the remaining uncertainty and length of time before effects of the Volcker Act allow for significant. Further, banks have been considering a response to the Volcker Act for months and many are now seriously exploring contingency plans which could make remaining on a bank-owned or funded alternative platform very appealing.

"Some of the brightest minds in the industry are unsure of how to best rethink their strategy, and different firms will interpret the requirements in different ways," he says. The ramifications of this limitation on proprietary trading by investment and commercial banks may result in:

  • Shifting talent needs: "As institutions struggle to unwind certain platforms they have in place and create platforms that comply with the new standards, firms will need talent that is more flexible globally, to take advantage of less regulated markets. They will also need commercially astute risk and compliance officers who can manage regulatory risk."
  • Compression of returns: "With additional risk and compliance parameters put in place around funds, you may see a resulting impact on returns," says Mr. Edwards. "Not as much risk – not as much reward."
  • Reduction of aggressive investors' inflows: "The possibility of compressed returns can also diminish the attraction to certain investors who have sought the hedge fund industry as an alpha generation machine."
  • Increased comfort level among institutional investors: "Conversely, certain investor groups – such as the more conservative endowments and boards of foundations – may feel more comfortable with hedge funds given the new regulatory oversight."

If you would like more information about Heidrick & Struggles' Hedge Fund Industry Trends report, or to speak with Daniel Edwards, Chad Astmann, or Rachael Timinsky, please contact Wendi Taylor Nations at 312 496 1810 or wtaylornations@heidrick.com.

About Heidrick & Struggles

Heidrick & Struggles International, Inc. (Nasdaq:HSII) is the leadership advisory firm providing senior-level executive search and leadership consulting services, including succession planning, executive assessment and development, talent retention management, transition consulting for newly appointed executives, and M&A human capital integration consulting. For almost 60 years, we have focused on quality service and built strong leadership teams through our relationships with clients and individuals worldwide. Today, Heidrick & Struggles' leadership experts operate from principal business centers in North America, Latin America, Europe and Asia Pacific. For more information about Heidrick & Struggles, please visit www.heidrick.com.



            

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