Hedge fund professionals are jumpier than a bag of frogs at a fireworks display. But a chronic lack of talent on the market – combined with the fact that the departure of a key employee could sink the whole company – has led to an increase in restrictive non-compete employment contracts and deferred bonuses.
“Hedge funds have gone from being the Wild West of finance to having more restrictive arrangements than investment banks,” says Adrian Crawford, a partner in the employment practice of lawyers Kingsley Napley, who works with hedge fund professionals. “12-month non-competes are common, but for partner level employees I’ve seen people locked out of the employment market for three years.”
Tenures at hedge funds can be incredibly short. To some extent this is down to intolerance of even short-term under performance at certain hedge funds – think Millennium Management, Bluecrest or Brevan Howard – but it’s also because annual bonuses have been paid entirely in cash without deferrals. It was therefore possible to pocket a bonus and move on.
90-day gardening periods were not uncommon, but more hedge funds are asking new employees to sign non-compete agreements that stop them working elsewhere for a year or more.
“Anything more than three-to-six months tends to give people pause for thought. Then they start looking at the details of the contract – Is it paid leave? How restrictive is the definition of a competitor?,” says Anthony Keizner, a hedge fund partner at Odyssey Search.
Hedge funds are trying to tie in existing employees – usually by offering a sweetener like equity in the firm – he says, but are exploiting the current weak hiring environment to force new hires into signing more restrictive contracts. When times are tough, employers wield the power, but when the market turns these sort of schemes could impede their ability to hire, he says.
Bonuses are also being deferred over longer periods of time. Anything over $250k is deferred over three years, with one-third paid out every 12 months, he says.
“Hedge funds want to make it financial unviable for their employees to go anywhere else,” says Crawford. “Bonuses are lost if they work anywhere else, and in some cases so are retirement provisions or any other gardening leave payments.”
The most high-profile non-compete case in recent years was that of Chris Rokos and Brevan Howard. The hedge fund tried to stop its former star trader from running his own fund for five years after departing. Rokos argued that depriving the world of his skills was “contrary to the public interest”.
As ridiculous as this sounds, it's is a common argument for hedge fund portfolio managers and traders seeking to challenge restrictive non-competes, says Crawford. “If it’s impossible for some to move to a new job, the big question is how long a period of time is reasonably necessary to protect an employer’s revenues,” he says. "Nine months, maybe, but anything over a year is questionable."
For hedge funds, this presents a potentially bigger problem. Traders move to the buy-side to earn more money than they could in banking and to avoid its politics and hierarchical structure. If this is no longer possible, there’s little incentive to make the switch. What’s more, those already in hedge funds are questioning their career choice and many want to ply their trade elsewhere.
“The most common requests are for a move to the mutual fund world,” says Keizner. “Yes, there are hesitations about ‘sleepiness’, perceived meritocracy, and the more muted bonus potential, but for many this is outweighed by the combination of perceived durability, long-term career stability, and high base salaries uncorrelated to performance.”