Exodus to hedge funds continues at rapid pace

A stream of hires by hedge funds is on the cards as institutional investors pour record sums into the sector.

An unprecedented surge in demand this year has forced GAM, owned by Swiss bank UBS, to close all its 12 multi-strategy hedge funds to new business.

David Smith, head of GAM's multi-strategy funds, worth $15bn, decided to close to new clients while sorting out ways to satisfy demand. One fund of hedge funds manager said: 'We're going to be facing capacity problems this year, and we're thirsty for good funds to back.'

Deutsche confirmed last week that John Wood, head of UK equities, who oversaw nearly 20bn (€30bn) in institutional assets, is to join Artemis.

As part of the deal, Wood will manage traditional funds alongside Philip Wolstencroft, whose method of picking stocks has recently produced strong performance. Wood will be reunited with Adrian Frost, his predecessor at Deutsche. However, Wood's decision to join Artemis was also motivated by his wish to manage a long/short hedge fund. This was not an option at Deutsche because of the large quantity of traditional assets he supervised.

A Deutsche spokesman said: 'John expressed a desire to run a hedge fund. But we decided it would not be possible to combine leading the team with running a long/short portfolio.' Old Mutual Asset Managers has lost the services of David Ross, a senior manager, and three of his six-person team. By impressing investors with their use of a computer-driven model, they were successful in raising hedge fund assets worth $400m (€336m), as well as traditional funds worth 225m.

It is understood that Ross and his colleagues want to start their own hedge fund. One of his clients at Old Mutual said: 'I don't expect to hang around now David has left the firm. Hedge funds are hungry for talent and their fee scales allow them to promise the earth. Traditional firms will have to fight hard to hang on to their stars.'

Lazard Asset Management is another firm that has been hit by an exodus of hedge fund managers. Merrill Lynch Investment Managers has been rocked by the defection of specialists to firms such as NewSmith Capital and Lansdowne.

One headhunter said: 'Demand for managers in the traditional market has dried up. But the hedge fund industry is displaying a healthy interest in hiring expertise.'

Managers like Ross, who develop their hedge fund expertise at traditional firms, are obvious prey. The manager of a fund of hedge funds said: 'To keep people like that employers have to offer their managers at least half the performance they generate.'

James Walsh, head of economics at Hermes, owned by British Telecom pension fund, the largest in the UK, said he was recruiting four people to evaluate ideas put forward by Albourne Partners, the advisory firm. He added: 'Pension funds should talk to each other about their experiences.'