Retaining and Promoting Talent for Hedge Funds

September 15, 2023 – Sandy Gross formed Pinetum Partners LLC in 2004 as a retained executive search and executive coaching firm; it has since been recognized as one of the top 50 executive search firms in the U.S. in financial services. In her coaching work, Ms. Gross partners with managers and leaders across a range of industries, including hedge funds.

Ms. Gross recently joined Hunt Scanlon Media to identify ways in which hedge funds can best retain and promote talent at a senior level in order to maintain stability and continuity.  “The hedge fund population continues to mature as the early well-known founders are reaching an age when they want to retire,” she said. “As a result, many have returned outside capital to their investors or spend time managing their own money. Some have seeded other hedge funds that will thrive beyond the founder’s own original hedge fund platform. Other founders have sold their businesses to entities giving up the culture and legacies they built or have shut down entirely.”

“For hedge fund leaders who want to create something that will last beyond their years, continuity has been evidenced with communication, planning, and the willingness of the founder, that they can enable others to step into the shoes of high-profile investment managers,” Ms. Gross said. “Subsequently, this will provide the potential for founders to retire or phase-out of the firm they created without it being shut down.”   

Origins of Hedge Funds

In the 1950’s, Alfred Winslow Jones reportedly “raked together $100,000 to set up a hedged fund,” generating extraordinary profits through the 1950s and 1960s. Almost by accident, Mr. Jones improvised an investment structure that has endured to this day. Since that time, the hedge fund industry has grown to become one of the most competitive and lucrative industries across the globe.

“In over 70 years the hedge fund industry has matured to thousands of hedge funds managing money for foundations, endowments, pension funds, high-net-worth individuals, and family offices,” said Ms. Gross. “The hedge fund founders have also matured.” The top CEOs of private equity firms, in fact, are showing no signs of retiring, thereby raising concerns for their investors whose money is locked up for longer periods of time, according to a recent article in the Wall Street Journal. “Succession matters less at hedge funds, because investors generally can withdraw money on a quarterly basis if they are displeased with a firm’s direction,” said the newspaper.

Sandy Gross has over 30 year experience in financial services, including 25 years in executive search, recruiting and coaching. Ms. Gross helps managers and leaders across a range of industries develop a broader perspective and supports them in gaining self-awareness, unlocking their potential, clarifying goals, and aligning their developmental needs with the objectives of their organization.

“Many have managed successful hedge funds for decades, and do not have plans to retire, nor do they have the ability to create an infrastructure to support them once they do retire,” said Ms. Gross. “However, similar to private equity firms, hedge fund CEOs are growing older, and although some hedge fund assets are more liquid than others, there is a growing concern amongst investors and employees as to who will take the helm, and carry the culture forward when these key men retire or step out of their daily activities driving the returns, and creating that ‘special sauce’ that others may not be able to replicate.”

Succession Planning: What We’ve Learned

Over time, several themes have surfaced with regards to the lack of succession planning and have revealed the successes that several firms have achieved by planning for succession, according to Ms. Gross. “Hedge fund managers are now prioritizing succession planning at an earlier stage than before,” she said. “They aim to establish well-defined strategies to appear more appealing to institutional investors, and at times, to facilitate strategic transactions.”

“Many of these firms are frightened of scaring off their investors by naming a firm successor especially when the key man has been running a firm for so many years,” said Ms. Gross. “Many hedge fund managers also believe that their activities within their firm’s should be kept a secret.”

Ms. Gross cited a number of employee perspectives and concerns:

• Of growing concern are hedge fund employees who have supported the success of their founders. Based on interviews conducted in the industry, employees feel they are often left in the dark, wondering what will happen to them if the founder leaves the firm, whether it is planned or sudden.
• Firms that are quantitatively driven “relying mainly on the algorithms and programing talents of their legions of PhDs” vs. relying on fundamental analysis have shown greater success in transitioning a firm to an individual or to an investment team.  This is because founders have been removed from the day-to-day investment decisions, and have been able to spend more time on bigger projects such as the strategic direction of their firms, according to Institutional Investor.

Investor Perspectives/Concerns

• The closure of hedge funds after the departure of a founder is not new: Investors and the sponsors are interested in knowing that the fund firm can continue despite a change in leadership, according to Hedge Fund Journal.
• Investors are seeing succession planning as a competitive edge, and are looking for it in the corporate governance of firms they are considering to invest their capital.   
• Some firms have been successful at executing a succession plan by taking five to 10 years to make the transition. The strategy has involved identifying, mostly from their internal talent pool, who will become the successor, clearly communicating it in their marketing documents, and rolling it out to their investors so there are no surprises.

Several issues seem to be at stake when dealing with the founders and the successors, since each of these individuals have their own agenda, according to Ms. Gross.  For the founder, it may be hard to give up control of what they may have started from scratch; having close ties to their “baby,” diminished self-worth, and a fear of losing their identity. “On the other hand, the successor, or the succession team, may be overly eager wanting to take control and exert their authority and leadership sooner than later,” said Ms. Gross. “Either way, the change in roles, expectations and communication all need to be managed carefully and thoughtfully.”

Related: How Talent is Driving Private Equity Success

Contributed by Scott A. Scanlon, Editor-in-Chief; Dale M. Zupsansky, Managing Editor; and Stephen Sawicki, Managing Editor – Hunt Scanlon Media