While investment banks are making their employees miserable in a cut-throat working environment, hedge funds are a happy family. In fact, it seems that unless you’ve been part of that family for some time, it’s very difficult to break into most firms.
Citi Prime Finance has just released a 44-page report into what it terms ‘people alpha’, or the concept that acquiring, retaining and working hard to develop and reward the employees you take on has a positive effect on performance. The happier and more committed the employee, the more likely he is to perform in his role, and therefore boost the hedge fund's investment returns. The four ‘pillars’ of people alpha are outlined in the chart below, along with the positive correlation between scoring high on Citi’s criteria and generating positive returns.
The report points out the oft-held notion that happy employees are productive employees, something that investment banks would do well to take note of. Most investment banks emphasise the importance of their culture, particularly at places like Goldman Sachs where loyalty and commitment to the ‘firm’ is demanded. However, it seems that some hedge funds take it one step further.
In looking at hedge funds’ recruitment tactics, Citi inadvertently stumbles across a decidedly clan-like approach to people management. Some hedge funds focus predominantly on hiring at the junior end and then moulding recruits into the person they want them to be.
One hedge fund, for example, with $5-10bn in AUM and 50-150 employees, says that working at other organisations can “taint” people. “We prefer to grow junior talent especially on the investment staff.
"Our view is that working at other places will taint you. If we hire someone out of school, there are no predispositions.” So much for diversity of thought.
Another firm says: “We have recently added more junior mid-level roles to our organization and we are hiring less experienced people to see if they can develop up to these positions.” In other words, if you want to join a hedge fund, you need to get in early, become part of the furniture and then the firm will both pay you well and invest in training and development.
The flip side is a ‘plug and pay’ approach to recruitment – namely only hiring people with a good track record, the relevant experience and who can hit the ground running. For multi-manager firms, this usually means hiring a portfolio manager and team to support them as a single unit, to work independently of the main company team. This is bad news for all those prop traders with aspirations to work for a hedge fund.