Hedge Fund Firms are Beginning to Look Like Traditional Asset Managers

  The extraordinary growth of the hedge fund and fund of funds industry has resulted in a dramatic increase in the number of individuals employed by these firms. While this absolute growth may be obvious to most industry participants, what may not be as obvious is the proliferation of new job functions as a result of the industry’s tremendous expansion. Until recently, many of these positions were found only at traditional asset management firms.

  The Westminster Group, an executive recruiting firm, sponsored the first comprehensive hedge fund hiring and compensation survey last year. Lois Peltz at Infovest21 conducted the survey and the results were published in early 2002. The survey concluded that none of the firms polled expected declines in staff and two-thirds actually expected staff to grow this year. Senior management, portfolio managers and research roles were viewed as the three most difficult positions to fill. Most new hires (70%) were expected to come from outside the hedge fund industry. Sources of new hires include banks and traditional asset managers.

  Other research, on the sources of funds for the industry, has dramatic implications for both the number and the type of employees that will be needed to sustain the growth of the hedge fund industry. According to a September 2001 hedge fund study published by The BARRA Strategic Consulting Group, less than 25% of the source of assets for Funds of Hedge Funds (FOHF) consisted of institutional buyers. However, as institutions continue to allocate more assets to hedge funds and FOHF, the industry will have to provide the same type of services that these institutional investors have customarily received from traditional asset managers. Thus, the recent increased institutional participation in hedge funds will provide the major impetus for the creation and growth of new positions.

  The BARRA study also states that, “To date, the professional standards for investment process, marketing and client service are still in a developmental stage. As traditional investors gain more experience with funds of hedge funds and as additional sophisticated clients (e.g., institutional investors) enter the market, these standards will be raised significantly.” David Bauer, co-author of The BARRA Study and now with Casey, Quirk & Acito, points out that, “The rising institutional interest in hedge fund investing is driving the rapid maturation of these firms. As a result, we are experiencing an expansion in demand for marketing and business management professionals. For all but the most mature firms, these are new roles.”

  Recent first hand experience confirms that the standards are beginning to change. Six months ago our firm contacted several hedge fund managers promoting an RFP (Request for Proposal) writer. At that time, these firms indicated they had no interest in RFP candidates, nor could they imagine ever needing that skill set in the future. Just last week our firm received an assignment from one of the hedge fund managers contacted earlier outlining a need for just such a candidate! Institutional investors and consultants frequently use the RFP process to select and hire asset managers including hedge fund and FOHF. At a recent RFP conference, one speaker claimed that well over 30% of the assets raised for institutional money managers were obtained via RFPs. In addition to RFP writers, alternative investment managers are now seeking client service personnel as well as other marketing functions including copywriters with expertise in both financial and promotional copy.

  The current investment environment is fertile for the hedge fund and fund of funds industry. However, to meet the growing demands and expectations of sophisticated institutional investors, the industry will need greater numbers of new employees with specific skills new to the industry. Meeting this challenge will transform our industry into a look and feel akin to traditional asset managers.

  The Alternative Investment Management Association (AIMA) is a global, not-for-profit trade association for the hedge fund community. With over 400 corporate members throughout Europe, North America, Asia and the Middle East - and Chapters in Australia, Hong Kong and Japan – AIMA focuses on education and understanding of alternative investments for institutional investors, industry practitioners, regulators and specialist financial media. Further information on AIMA membership can be found by contacting Nicole Fleming (nicole@aima.org) or by visiting www.aima.org