Hedge fund managers are not beautiful and unique snowflakes. They are not masters of the universe consistently beating the market propelled only by their individual expertise. No. They look a lot like an exclusive club where performance is directly correlated to who they know and who they’ve worked with previously.
A new study into the UK hedge fund industry by academics at the University of Konstanz in Germany, claims there’s a direct relationship between an overlap in previous employment and the performance of hedge fund managers.
It examined 1,799 hedge fund managers working in the UK between 2002-2012 and found that 41% of them had worked at the same firm at the same time. These sort of ‘social connections’ lead to an overlap in performance, it suggests.
“This result may be capturing the exchange of information among the managers in the network that leads to similar bets,” the study concluded. “This result seems to be driven by hedge funds betting on distressed securities, convertible securities, corporate events, and merger arbitrage – all hedge fund styles which rely on the communication of trading strategies and probability assessments among hedge fund managers.”
This theory feeds into the growing feeling that hedge fund professionals are not alpha wolves, but more like herd animals – the whole concept that they’re “crowding” the markets. Paul Tudor Jones said at a recent conference that hedge funds’ trading activity in the euro versus U.S dollar was akin to a herd of cows that eats grass down to the roots.
From an employment perspective, it’s clear that traders and portfolio managers in hedge funds like to congregate. Bluecrest Capital Management lifted out a team from Nomura’s prop trading desk in 2013, and has lifted numerous people from the bank since. Moore Capital swooped on a series of people from SAC Capital when it closed its London office. Now that SAC has reopened under the rebranded Point72 Asset Management ‘family office’ it has been hiring some of its former employees.
Hedge funds want to see a clear track record in the traders and portfolio managers they take on and it’s natural for senior staff to want to hire people they trust from their previous employers. However, this study suggests there’s a need for some new blood in the industry.
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