Hedge funds are losing the battle for the best and brightest young finance professionals to private equity. Both hedge funds and private equity firms are stepping up efforts to attract graduates and juniors in investment banks in order to train them up from scratch. But the performance issues that have dogged hedge funds over the past couple of years have not just prompted a backlash from investors – talent is turning away too. “Hedge funds make for a lovely knocking block. If there’s a bad story written about hedge funds, there’s often a positive one written about private equity,” Luke Ellis, CEO of Man Group told the London School of Economics Alternative Investments Conference earlier this month. “Private equity is in fashion, hedge funds are out of fashion.”
Juniors in investment banks are increasingly trying to get into private equity over hedge funds. In a survey of 500 first year analysts in front office roles in bulge bracket investment banks, headhunters Odyssey Search Partners found that 74% were “very interested” in private equity, compared to 20% who said the same about hedge fund jobs. It’s getting worse for hedge funds – last year, 45% of respondents said they wanted to move into PE, compared to 24%. “Poor performance and negative press around hedge funds is contributing to this increased relative interest in PE”, says Anthony Keizner, partner at Odyssey.
Hedge funds’ traditionally secretive nature has led to many illusions about working in the sector that are now being shattered. Ellis also said that hedge funds are no longer a path to riches – even if he was taking about becoming a billionaire – but funds that perform well are still paying seven figure bonuses to their portfolio managers.
The problem is that fewer hedge funds are hitting their watermarks. Across the industry, new figures from investment community website SumZero suggest that most hedge fund jobs pay less than $300k.
“PE offers more stability in comp too, and bonuses are guaranteed,” says Keizner. “This differs from most public investing analyst job offers, which will pay a bonus depending on the performance of the individual and the overall firm.”
Hedge funds that do succeed in attracting juniors tend to “highlight the stability of their capital, the longevity of their teams and their flat structure and chance of significant early responsibility,” he adds. Understandably, Ellis was keen to point out that students shouldn’t just write off hedge fund careers. In fact, he said, because they’re out of fashion now, it could be a good time to get in. “Whatever the in vogue thing is you should find a way of tacking the other way,” he said.
The problem for investment banks, hedge funds and private equity firms alike is that juniors see their time at each as relatively transient. It’s very too easy to paint millennials as being flighty, or non-committal – especially when many crave a stable, well-paid career – but it’s also true: those in finance do appear to be looking for the next move. “I’m in investment banking to learn the nuts and bolts of finance,” one investment banking analyst told the survey, adding that they wanted to maintain a “steep learning curve” throughout their career – which would mean not just leaving banking, but jumping out of PE after a few years. In other words, they want to build out a skill-set to use as a stepping stone to something else.
Banks in particular are at the sharp end of this. Only 57% of the 500 juniors surveyed by Odyssey said they ended to stay until the summer of 2018. 30% said they were leave sooner for the right job and a mere 1% said they intended to stay beyond associate level.