Hedge funds are in cost-cutting mode, whether you believe the current crisis hitting alternative investment managers is cyclical or secular.
Not only are hedge funds struggling to pay their professionals as much as they have in the past, but the regulatory and operational burden they have to shoulder is greater than ever. What does this mean for those working in hedge funds now?
More hedge funds are using technical training and individual employee personal skills development and coaching to increase engagement with employees and prepare them for promotion in anticipation of a better trading environment, according to John Breault, the president and CEO of Breault & Smith, a hedge fund, private equity and real estate executive search and consulting firm.
“Millennials thrive on growing and more frequent feedback, and we are recommending ways for clients to differentiate themselves in their employees and potential employees’ eyes,” he said.
Some hedge fund professionals had become spoiled by the long-lasting party of easier returns, but the past few years have changed all that. In many cases, that has meant a greater willingness on hedge fund managers’ part to negotiate fee structures with investors. And often, when the fees an investment firm collects go down, the compensation of its employees goes in the same direction.
In general, most hedge funds try to do the right thing for investors, have a good process and align themselves with investors, but some have lost their investor-friendly philosophy, which has to be brought to the forefront again, according to .
“If you have a bad year you might not make performance fees for another two years, so you shouldn’t rely on that to run your business or assume that it will be part of your compensation,”Afroz Qadeer, the CEO of Kettle Hill Capital Management, a long-short hedge fund that focuses primarily on the U.S. small-cap space with $155m under management. “If you get it great, you did a great job for investors, but temper expectations – don’t count on it every year, because investors are fickle and the markets are fickle.”
In the old days, management fees were 1% management and 20% performance – 2% and 20% came later, and many say that the latter is no longer the industry standard.
“Over the years [hedge fund managers’] compensation expectations went up, and people make significant amounts of money, but that may not have fit in with the business needs of hedge funds when tougher times come. If you are interested in more stability, go work for a larger institution – don’t work for a smaller to mid-sized hedge fund, which makes up the vast majority of the industry.”
When faced with staffing needs, hedge funds face a dilemma – does it makes more sense to hire full-time employees and build out an in-house team or go through the vetting process of third-party service providers? On the flipside, hedge funds forced to cut costs are cutting middle- and back-office headcount and turning to vendors to fill the gaps.
Outsourcing firms like getting more creative and granular with their more niche outsourcing services, for example, hybrid fund administration – including private equity, real estate, business development companies (BDCs) and multi-strategy hedge funds and funds-of-hedge-funds – bank loan, mortgage and real estate investment trust (REIT) servicing.
“We outsource a fair amount of our compliance, legal and also some of our IT functions,” said Qadeer.
“We’re at a size and scale where it makes more sense to hire two or three people in-house, and we have the budget to do it, rather than bootstrap or jerry rig internally or outsource it,” he said. “In other cases, we can’t hire full-time personnel because you have to deal with training and benefits, and it might be more cost-effective to outsource it.
In addition, some hedge funds have increased their use of paid interns to cost-effectively supplement analytical positions. Others have even taken a long, hard look at Uber’s business model.
“We’ve seen an increased pace in [hedge funds’] adopting of gig economy principles, an environment in which temporary positions are common and organizations contract with independent works for short-term engagements, and we’ve added services in those areas,” Breault said.
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