The new millennium saw a fresh meme come to the fore—outsourcing. Rooted in lessons learned after the enactment of the North American Free Trade Agreement in January, 1994, outsourcing became the new normal across the broad spectrum of American business.
Because corporate management is often guilty of “group think”, it raced to outsource anything and everything that did not meet the definition of a core business function, in many instances decimating the very infrastructure driving the success of the enterprise.
Hedge funds, as they often do, moved in that direction as well, but in a well-conceived manner, as compared to the broader business community. At the same time hedge funds were outsourcing certain back-office functions, they were bringing others inside the tent. One excellent example of this “in-sourcing” is evidenced by the rising number of in-house lawyers employed by the hedge fund industry.
What Drives this Trend?
As a result of the financial crisis, the federal government embarked on a regulatory spree, implementing new rules and passing legislation at a pace unparalleled in the nation’s history. This created an unexpected windfall for the tranche of legal firms with the expertise required by the financial services industry in general and hedge funds in particular.
Following the accepted rule of supply and demand, legal fees began to spiral upward. Hedge funds countered by recruiting in-house lawyers, not only to control costs but to effectively address the tide of regulations washing over the industry.
Unanticipated Consequences
In the scramble for experienced legal talent, firms that specialize in structuring and establishment, regulatory compliance, documentation support, and legal vetting of new product offerings have seen their ranks decimated as hedge funds engage in a bidding war for the best of the best. As a result, before agreeing to represent a hedge fund, many law firms are now actually requiring hedge funds to ink an anti-poaching agreement.
This has created an environment in which hedge funds relying on the services of an outside firm may be at a distinct disadvantage to firms with in-house talent, not only with respect to costs but also with respect to the quality of services.
Hedge Fund Jobs
The hedge fund trend toward in-sourcing legal talent has opened a door that was all but closed to the legal profession. Lawyers with relevant expertise have unprecedented employment opportunities in the hedge fund industry. In fact, in the last two years, legal/compliance officers in hedge fund firms have been above the 50th percentile in terms of total annual compensation. An attorney’s base salary may actually be no better than he might expect to receive in a law firm. However, for lawyers willing to accept some risk, hedge funds offer bonus pay opportunities that can easily push total compensation to 150 percent of base pay and beyond.
While the trend toward in-house legal counsel gains in momentum, attorneys with the requisite skill-set should consider this potentially lucrative career move now rather than later. There are a finite number of hedge funds and an equally finite number of employment possibilities within the industry.
And an extra bonus: an attorney that joins a hedge fund doesn’t have to own-up to being a lawyer. They can just say they work in a hedge fund. This is an important benefit, considering that lawyers ranked sixth on the list of most despised professions – just before used car salesmen – and hedge fund professionals didn’t crack the top ten. How does one put a price on that?
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