Hedge Fund Hiring Battles Cross-Currents

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Hedge funds continue prospecting for portfolio managers and analysts, even in the face of weakening returns, diminished access to credit and the threat of investor withdrawals and prime broker failures.

However, financial turmoil is forcing many smaller hedge fund firms to cut back, and is slowing the hiring process even for large fund companies that view the crisis as an opportunity to recruit top talent that wasn't available before.

Nevertheless, hedge fund recruiters say their business has picked up and their largest clients aren't cancelling any searches. Neither a reported industry-wide decline in incentive fees nor an upturn in redemption requests from investors is affecting the hiring climate yet.

A Temporary Distraction?

In the near term, gyrating markets are monopolizing fund managers' attention and leaving them with no time to meet with candidates, says Adam Zoia, managing partner of Glocap Search. He advises jobseekers to be patient and await the start of 2009, when he anticipates "a little bit better environment for searching for a job than right now in the hedge fund industry."

Although hiring decisions have slowed recently, "we've had no cancellations of searches," Zoia says. "In fact, we've had an increase in search requests from the very largest of our clients."

Another hedge fund recruiting firm, IJC Partners, recently gained "four or five" new clients for contingency searches, says Kyle Ramkissoon, a principal and founding member. He reports demand for professionals with experience in distressed assets and high-yield debt. "We're even seeing a lot of demand for long-short equity guys" in the health care and energy sectors, he adds.

Illustrating the opportunistic mind-set of many employers, one client told Ramkissoon, "I don't have to buy out anybody's bonuses, because nobody's getting bonuses." As a result, that client expects to save at least $500,000 on each hire.

At Glocap, Zoia says client activity is running on pace with 2007, which was the firm's busiest ever. But he expects total hiring in the fund industry will be down this year, due to a significant pullback in hiring among smaller fund companies.

Small Players Get Squeezed

Smaller firms are more exposed to the whims of the high-net-worth households that make up hedge funds' traditional investor base. Over the past several years, large, well-established fund groups succeeded in diversifying their business by attracting money from pension funds, endowments and other institutional investors. Those tend to be patient investors who rely on formal processes and board oversight when choosing asset classes and managers. "Those guys make five- and 10-year allocation decisions," notes Zoia. In contrast, high-net-worth clients are "much more trigger-happy."

As a result, smaller fund firms that post investment losses are more likely to lose investors than larger ones. "There's been a consolidation, a flight to quality," Zoia says.

Various fund groups have reportedly suspended redemptions so they won't be forced to sell assets to fulfill those demands. Funds that took that step include activist investor Guy Wyser-Pratte, New York-based Amber Capital, and London-based Cheyne Capital, according to an article in Wednesday's Financial Times.

Prime Broker Worries

Another current worry for fund firms is seeing their assets tied up in court if their prime broker goes bankrupt, as happened with Lehman Brothers. "Amber told clients it was suspending withdrawals because it could not calculate the value of assets at Lehman's London arm, where administrators say it could take months to return even assets held in accounts safe from bankruptcy," the FT says.

Meanwhile, market losses are cutting off the incentive fees that typically contribute most of a fund company's revenues and a portfolio manager's annual bonus. A mere 10 percent of hedge funds performed well enough to collect an incentive fee during the first seven months of 2008, according to a survey of 4,000 funds by Eurekahedge, a Singapore-based data and research firm that tracks the hedge fund industry. Most funds' performance is likely to have worsened further since then, notes Financial News, which reported the survey.

Still, Zoia sees little danger these problems will halt the industry's growth. Although market losses might shrink assets this year, institutions won't reduce their allocations to hedge funds, he says. That means new money will continue flowing in, fueling an ongoing need for people to manage it.

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