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VIEW FROM THE TOP: THE BLURRED PICTURE OF FUND MANAGEMENT

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​In my line of work, as an Executive Search Consultant for the Hedge Fund and Asset Management sectors, I am acutely aware of the rather unusual paradox in which, by very nature of not being on the ‘front line’ ourselves, we can never know quite as much as about the intricacies of the roles for which we are mandated as those who actually end up in them. Yet to do our job properly we must be able to provide a detailed and nuanced insight into each of our clients, and the opportunities offered by them. Within the wider world of financial services, the field of hedge funds and asset managers is arguably one of the more impenetrable, at least at surface level, for those seeking a move into one of its many facets. This in part due to the sheer diversity of investment strategies and methodologies that lies under this broad umbrella, also to the historically elusive attitudes still found in many independent fund managers to scrutiny by almost anyone other than investors and regulators, and lastly – no doubt a consequence of these previous two points – because of the extraordinarily vague fashion in which this industry is represented to the general public. Consequently I thought I would use this soap-box moment to try and demystify my area of practice and hopefully elicit some new thoughts and feelings to those seeking opportunities within the area.

Over the years, I have borne witness to a staggering tendency, mostly within the media and notably even within the financial press, to refer, with the broadest of brush-strokes, to ‘hedge funds’, as if this all-encapsulating term actually denotes consistently comparable entities.

While I appreciate that people only have so much time on their hands, and that lengthy explanations of the intricacies of certain strategies take up valuable column inches, I believe that failing to provide at least some level of specifics when referring to ‘hedge funds’ in an article is at best lazy, and at worst detrimental, unless penning the usual tabloid shock-pieces along the lines ‘Hedge Fund Manager In Billion Dollar Pay-Day/ Beds Super-Model / Builds Statue of Himself in Rural Village”. To hammer this point home, trying to make a serious observational point about hedge funds in all their many incarnations – eg. as is so popular to discuss, about their performance as an alleged asset-class in a given month or quarter – is rather like writing an article describing ‘animals’ or ‘birds’ as entirely homogeneous groups, rather than acknowledging their extraordinary diversity in diet, behaviour, physiology, etc. etc. At the most obvious end of the spectrum, nobody should really be mentioning a CTA strategy in the same breath as a deep-value equity fund, but even amalgamated references to funds investing in the same asset class, or with superficially similar strategies, can paint quite a skewed picture. Leaving aside potentially detrimental consequences of the distorted view of the industry which the general public receives from such vague depictions, I have also realised from conversations with those actually working, or aspiring to work, on the buy-side that their views on the precise nature of specific strategies, let alone funds, can be clouded as well. I am sure that most experienced industry members tend to take such pieces of writing firmly in context, and so take any sweeping generalisations with a deserved pinch of salt and do not let them influence their understanding of the individual funds operating within the space. However I have seen and heard first-hand some slightly less experienced, but nonetheless highly astute candidates, from the buy-side as well as sell-side, espouse rather rashly preconceived ideas about one type of fund or another, and this is clearly not conducive to them searching effectively for a job in this industry.

A second and somewhat related issue is the debate over what constitutes an asset manager as opposed to a hedge fund.

I am quite regularly surprised by how adamant people to whom I speak can be in their stark differentiation between the two, and yet, while there are certain tenets which arguably could neatly assign an investment house to one or other of these supposed camps – for example fee structure, correlation to the markets, or, at the basest level, size and infrastructure – it does not require much investigation to discover that the lines are more often than not extremely blurred. A particularly recurrent aspect of this debate is over long-only versus long/short funds, when in fact many of the latter – except for perhaps market neutral funds – operate with a markedly long bias, and can have equivalent portfolio concentrations, investment horizons, risk appetites and research methodology. If one works on the basis of defining a hedge-fund as an investment vehicle which generates alpha, or which performs under all market conditions, then it could just as well be a contrarian long-only fund or a more conventionally hedged product. The fact is that we see businesses, which are firmly regarded as hedge funds, developing what would be regarded as ‘traditional’ product offerings, while simultaneously a significant number of the old-established, institutional asset managers have now made concerted efforts to run more definably ‘alternative’ strategies. Consequently, in any of these cases the skill-sets required by candidates will remain essentially the same for each given strategy, regardless of the apparent type of institution under which it operates, and – all things being equal – there should be just the same intellectual rewards in store for them too.

Where some elements of difference can be established between hedge funds and asset managers is in terms of business infrastructure, and consequently culture, although even here one can encounter some slightly preconceptions.

Stability is an aspect which people sometimes cite to me, claiming that the hedge fund world is fraught with fragility. While it is true that most of the firms habitually labelled as ‘asset managers’ can boast vastly superior assets under management to the majority of their so-called ‘hedge fund’ counterparts, there are exceptions on either side, but size – while usually helpful – is not always perfectly correlated to security; it is far better to have a solid AUM built from well-informed LPs with a willingness to commit long-term, than it is to have more capital but under potentially risky liquidity terms and from investors who have invested in a brand name rather than through detailed appreciation of a specific strategy. Similarly, the idea of being backed by a global investment bank might seem like a safety net and a source of added credibility compared to a small independent outfit, but firstly this is again applicable to both boutique long-only funds as well as hedge funds, and secondly has been shown to be potentially detrimental should said investment bank encounter any complications within its sell-side offering, the ramifications of which will invariably affect the buy-side arm. It is true that hedge fund strategies are more likely to employ leverage than vehicles within asset managers, and this implicitly means there is a greater risk of a dramatic blow-up and perhaps as such that more audacious personalities are likely to be found within the team. However, there are – and increasingly so in the years since the Crisis – a considerable number of hedge funds which do not undertake such gambles, and regardless of this, the idea of an aggressive ‘hedgy’ stereotype is predominantly unfounded. Following on from this point, the accusation that so-called cults of personality can be prevalent in the hedge fund world is, for the most part, similarly unfair. First of all, for all that a more institutionalised organisation may passively curtail this sort of situation, one can just as easily find hugely influential, singular individuals not only within specific teams of an asset manager but even in the upper echelons of its strategic management or on its board, as one can in a hedge fund; this is all too clearly evidenced by the changes of fortunes at certain institutional managers with the departures of key investment personnel. Secondly, the idea of a central leadership does not intrinsically have to be negative if that person shows humility, wisdom and a willingness to listen, and indeed can be one of the best ways to bring about an aligned business and investment philosophy, as well as a strong mentorship culture.

It may appear that I have shown some sort of bias towards hedge funds, but if so then I have failed as my point in this article is to show that each house – regardless of what terminology is conventionally ascribed to it – must be judged on its own merits.

The same due diligence and meticulous thinking must be shown when pondering as to what your ideal investment strategy would be. You may well have decided very specifically upon one particular style of investing – event-driven, let’s say – but are you thinking more along the lines of event-value than hard catalyst or merger arbitrage, in which case would it be such a terrible idea to at least consider looking at roles with a value-oriented long/short or even long-only equity fund? Equally, if you are casting the net wide and are open to opportunities with any and all variants of fundamental-driven equity funds, then at least try to pin down a few common denominators, such as investment horizon, portfolio concentration, or biases for or against quality, that would underpin your ideal personal investment philosophy and methodology.

As I have tried to emphasise above, the world of hedge funds and asset managers is far too often over-simplified, and in apparent efforts to create refinement and clarity each supposed ‘side’ is instead forced – by the press, the public, etc. – into two utterly unhelpful amorphous blobs. I sincerely hope that this article, personal and highly subjective as it is, reveals that on one hand the generalisations around the industry are often hopelessly ill-conceived, while the allegedly clear distinctions are often far blurrier. Every firm, every fund and every team has its idiosyncrasies, and in looking to pursue a career with any one of them you must dig deep below the surface. So what steps can you take to ensure you are as carefully informed as possible?

Firstly,  look beyond the obvious. Every strategy – as much as they can be delineated – will have a pantheon of a dozen or so renowned managers pursuing it, but these lists are far from exhaustive when it comes to identifying high quality managers.

Try to gain access to the content of each fund’s portfolio. This will give you a far clearer insight into its investment methodology than any surface-level labels – like ‘special situations’, ‘long/short equity’, ‘value-biased’, etc – which they may be ascribed to them .

Find out the exact backgrounds of as many of a fund’s team as possible. Not only will this provide you with insight into the subtleties of their investment style, but it may also forewarn you as to their likely culture, and potentially even any hiring biases which they might have.

Lastly, or all that I am acutely aware of the irony that I refer, for simplicity’s sake, to my practice area at Altus as ‘Asset Management & Hedge Funds’, a good head-hunter is there to provide the depth and nuance which will allow you to understand and judge these prospective employers on their own merits, rather than through superficial labels.

For more of a detailed digest of the above please contact: Charles.morrison@altus-partners.com