The booming private market has some hedge funds spreading into private equity's domain. Now a tug-of-war has broken out over talent.
- Hedge funds and private equity firms are no longer staying in their lanes and are increasingly jumping between public and private markets.
- The convergence of hedge funds and private equity has led to fight for talent as both sides try to pitch prospective employees and investors that they are all-encompassing alternative-asset managers.
- It comes as the starting pool for talent in finance continues to dwindle and Silicon Valley siphons Wall Street professionals away.
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As massive companies stay private longer and money pours into the private markets, private-equity firms are booming. Now hedge funds that have traditionally focused on the public markets are getting in on the action.
That's creating fresh competition for talent as the lines blur between the alternative-asset managers.
Private equity and hedge funds, especially the biggest firms, are looking more like each other. Stock-picking hedge funds like Third Point Management, Tiger Global Management, and Coatue Management have invested in private companies like SoFi, Peloton, and Instacart, for example.
Traditionally, hedge funds have been more liquid and short-term-focused than their private-equity peers, with investors able to pull their money out at the end of each quarter. Private-equity investors are more patient, with the expectation that the strategy will take years to play out.
But a JPMorgan survey of institutional investors suggests that hedge funds' biggest investors - pensions, endowments, and foundations - are comfortable locking their capital with a strategy for years. More than half of endowments and foundations are comfortable with a lockup of three years or more, the survey said, while 40% of pensions are.
IDW Group founder Ilana Weinstein said some funds are "changing their stripes" to transform their strategy to focus on what their strengths are, she said, even if it means giving up some of what it means to be a hedge fund. Some long-short managers, Weinstein said as an example, are giving up on shorting and running long-only books.
The added performance pressure from more players in the alternatives space has hedge funds "having a 'come-to-Jesus' on what they are best at," Weinstein added. Meanwhile, private-equity firms have been running credit and special-situation funds that often cross into hedge funds' territory.
Historically, hedge funds have recruited from large private-equity firms' associate programs. But with the hedge-fund industry's recent struggles, 2019's hot start notwithstanding, and expected consolidation, there's been an uptick in movement in other direction, according to recruiters.
"There's a natural talent flow from hedge funds to the private market funds because that's where the [investor] interest is," Noah Schwarz, an executive recruiter for Korn Ferry who focuses on the private markets, said. "They're following the money."
The fight for talent between hedge funds and private equity comes as myriad other forces are pressing on financial firms, like top young prospects being siphoned away by Silicon Valley and growing margin pressure on active asset managers.
Role reversal
Top PE firms have long had public market exposure through special-situation funds, and hedge funds are trying to pry off a piece of the swollen private market for themselves.
This convergence has led both sides, especially the biggest funds, to pitch themselves to investors as full-stop alternative-asset managers, Schwarz said. Private-equity giants like KKR and Blackstone tout their dozens of different businesses on their websites like insurance and closed-end funds, while quant hedge funds like AQR and Two Sigma have liquid retail funds and a venture-capital arm, respectively.
This dynamic has expanded the suitors for people who at one time would have been recruited only by one side or the other, heightening the competition between firms. It's also caused hedge funds to lose talented people and to tweak their strategies to keep investors.
Och-Ziff's cohead of investor relations, Nathan Urquhart, is now a managing director at Carlyle after more than a decade at the hedge fund, and Millennium's former head of financial planning and analysis, Shai Kopeld, joined Blackstone as a senior vice president in March. A LinkedIn search showed several early-career people jumping from analyst and associate roles at funds like Citadel and Millennium for similar roles at Apollo and KKR.
The additional competition has forced hedge funds to be more aggressive in pursuing private-equity talent, which recruiters say used to be an easy pool to pull from.
Jonathan Jones, former head of investment talent development at Point72 Asset Management, wrote an op-ed in an industry publication last summer titled "This is why hedge funds are better than private equity for M&A analysts." The piece said that one out of every five portfolio managers at Steve Cohen's firm had spent time in private equity.
"Not only do former PE associates bring with them a valuable skillset that translates well to investing in public equities, hedge funds can offer a deeper sense of ownership, early responsibility, and a path to full discretion on investment decisions (i.e., as a PM) that's hard to come by in PE," Jones' pitch reads.
Hedge funds have also tweaked their compensation structure to match the more steady pay of private-equity firms, Schwarz said, which has the double benefit of helping recruiting and retention. While hedge funds pay based on a fund's recent performance, private equity's longer time horizon means compensation is more consistent.
"It's just a different mindset; it is crazy the volatility in pay in hedge funds," Schwarz said.
A smaller pool
No conversation about talent in finance can happen without a reference to talent that the tech industry has pulled from Wall Street, observers say.
"The pool gets smaller and smaller," Schwarz said, as people leaving top schools pick Silicon Valley over finance.
For hedge funds, this shrinking of options has happened at the same time the industry has dealt with an investor base hyper focused on fees and performance. With another option now, prospective hires might prefer the less volatile private-equity space over the up-and-down hedge-fund industry, recruiters say.
And the incoming talent from the most pedigreed schools who choose the biggest banks' investment-banking programs over Silicon Valley will have more power in this smaller pool, but still have to make a tough choice, Evan Zivotovsky, a founder of High Water Staffing, said.
"The ones who really dig into modeling, doing deep research dives, they are the ones who have to decide if they're more interested in public markets or leveraged buyouts and private market investing," he added.
His warning for those about to choose? "The grass is always greener on the other side."