Your manager and mentor is quitting to start his own hedge fund and has picked you – you! – to move with them. Do you quit the bosom and (relative) security of a large investment bank for a fly-by-the-seat-your-pants start-up in order to secure a ticket to a potentially high-paying buy-side job?
We ask because small hedge funds are closing at an unprecedented rate, and should the start-up fold, it’s likely that the high-flying founder will come out better. Take Kay Haigh, an emerging markets trader at Deutsche Bank who quit after 13 years in 2011 to launch hedge fund Avantium Investment Management along with seven of his team.
This time last year, Avantium was forced to shut up shop. Haigh has now been installed as global head of emerging markets at Morgan Stanley. The remainder of Avantium’s investment team appear to still be looking for new employment – at least according to the FCA Register.
“The key thing to remember is that not everyone is suited to be an entrepreneur,” says Andrew Pullman, managing director at consultancy People Risk Solutions, which provides HR for smaller hedge funds. “They could be a great trader, an inspirational manager and someone with the reputation to attract assets. But they’re moving from large bank where all the infrastructure is provided for them. The day to day business management can be a challenge for some.”
899 hedge funds closed in the first 11 months of 2014, with European funds particularly hard hit. Switching to from a bank to a hedge fund looks like a bigger gamble than ever, particularly if you’re outside of a partnership where you’re able to get a share of the profits during the good times to compensate for survival risk.
In London at least the salaries and bonuses for the rank and file no longer justify the risk. Average bonuses for directors at hedge funds were around £85k with total compensation of £170k, according to figures released last year by Emolument.com.
Another problem is that if your senior manager leaves the bank, it usually means your mentor and internal sponsor is going too. Sticking around without an internal network can be also be viewed as a risk.
“Don’t hang your colours on one individual,” says Pullman. “Make sure you have a broader base of support internally – ideally three to four people – because if your career hangs on one person it’s likely that they will move on or get fired. It happens a lot. That way if you do have the option of moving to a hedge fund, you can make a measured decision rather than one fuelled by fear.”
Investment banking traders who failed at hedge funds are increasingly gravitating back again. Those still looking for a buy-side switch are now seeking stability, says Anthony Keizner, managing director and head of the hedge fund practice at headhunters Glocap.
“After being burned by the experience of a small fund not raising a sustainable level of assets, we often see managers look for more stable platforms to invest from,” he says. “‘Stability’ often translates into captive capital, the kind under management by a very large hedge fund, a family office or a sovereign wealth fund rather than a bank.”
However, loyalty can also be rewarded. Christian Levett, founder of commodities hedge fund Clive Capital which closed its doors in 2013, was later hired by Moore Capital and persuaded some of his former reports to join him. Alan Bevan, the former chief economist and strategist at Clive and Mike Lawson, a portfolio manager, moved across to Moore last September.
Hedge funds are being weighed down by increasing compliance costs and it’s the larger funds with economies of scale which are best able to weather this. Smaller funds are a less secure options, but there are still things you can look for to assess a start-up’s chance of survival.
“Factors in assessing the likely success of a start-up include the level of initial capital commitments (ideally over $100m), the brand, reputation and track of the founding members, and the ability to assemble an initial team that has grown a business to scale,” says Keizner. “Business advisors like prime brokers and hedge fund recruiters can help assess the likely strength of the new firm to attract capital and talent.”