Why only the worst people tend to work for new hedge funds

New hedge fund launches are at their lowest level since before the financial collapse. In fact, more firms now close every year than open. And if you look at recent headlines, most of the funds that are being shuttered haven’t been in business for all that long; many close after just a year or two. Oftentimes the blame falls at the feet of the current fundraising environment, in which new funds can struggle to build up considerable assets. But that’s not the only reason. Some believe that quick closures are simply a symptom of a lack of talent.

“There is a sort of irrational exuberance with every new shop that comes along – fresh start, ground floor opportunity, but in my experience, most of the time [new funds] won’t pay up for the genuine stars and end up with the 3rd guy on the desk at one of the elite shops. And they fail within three years,” said one veteran buy-side recruiter.

A Connecticut portfolio manager echoed similar thoughts but said it’s not just about a lack of substantial offers. “There’s usually a reason someone is available or open to leaving,” he said. “Just look at [the resumes] of people who jump to a new firm. They’ll have worked at four places in seven years.” PMs and traders will often leave voluntarily when they know they’re running out of rope at their current fund and don’t want the stain of being let go, he said.

Meanwhile, traders who are generating steady returns and have proven themselves over the long-term are typically taken care of and have no reason to leave, he said. “Look at the star traders out there. The only time they walk away is to start their own fund.”  

And that’s where the problems begin, according to a New York hedge fund manager. “People bring in their own guys – which can be good and bad, by the way – and then they need to add bodies in short order.” Good traders and analysts at established firms typically aren’t going to leave hastily for those type of opportunities, he said. 

“Lots of funds are advertising for people aggressively. But getting them to actually pull the trigger [on someone really talented] is pretty rare,” according to the recruiter. Mediocre people are then rushed in, and newer funds are left playing from behind, no matter how good the founding partners are.

This is where quant funds can have such an advantage; they’re competing over a different talent pool – one that is deeper, younger and cheaper. “There are just hundreds of good old-fashioned software developers and data engineers…and a lot of them are Asian grads from the top 20 U.S. schools doing time as VISA hostages,” the recruiter said.

Of course, there are plenty of exceptions. The timing can work out perfectly and some new funds can operate effectively while adding headcount judiciously. A second hedge fund recruiter said the same dynamics are in play with upstarts in any industry. The first round of hires are necessities and don’t always work out. But in the highly competitive hedge fund world, “you don’t have time for second chances,” he said.

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