We’ve all seen the headlines about investment bank traders or mutual fund managers leaving their jobs to join or start their own hedge fund. Is it just for the money? Bragging rights? Or a certain cache of saying you’re a hedge fund manager at the local watering hole?
A recent article in All About Alpha explores the other reasons that continue to lure talented traders. Among them, the freedom and flexibility that comes from being higher up in an organization, and not having to kowtow to bosses whose investment philosophy may differ from yours.
However, the article exposes the dark side of traders jumping ship. It cites a new research paper from a group of academics entitled, The good, the bad or the expensive? Which mutual fund managers join hedge funds?
Authors Prachi Deuskar, Joshua M. Pollet, Z. Jay Wang and Lu Zheng found that mutual funds are able to retain their best-performing managers in the face of competition from a growing hedge fund industry by allowing them to manage a hedge fund side-by-side.
However, mutual fund managers with poor past performance are more likely to leave the mutual fund industry. And a small fraction of these poor performers find a job with smaller, relatively unestablished hedge fund companies, especially during the decade of 1997-2007, when the hedge fund industry was expanding very rapidly.
Thus, surging hedge fund industry provided an opportunity for poor performers to end their sagging career in the mutual fund industry by finding jobs with obscure hedge fund companies.
There is some justice, however. The study authors noted that mutual fund managers who fled to hedge funds took in substantially lower assets under management (AUM). This lower AUM meant that making up for the loss of their management fees by earning incentive fees was practically impossible.
The past two years have changed the playing field for everyone, of course. With the hammering that many hedge funds experienced in 2008, from market turmoil and redemptions, every hedge fund manager is now under the microscope for justifying their performance and fees.