The hedge fund industry has faced many challenges since the Great Recession of 2008–09. Many hedge funds were liquidated, and many surviving funds provided anemic financial returns to investors. In recent years, the industry has bounced between strong and weak annual performances. Experts believe the strong financial returns enjoyed by investors in the late 1990s may never be achieved again because of growing demand for greater transparency and institutional quality policies and procedures from potential institutional investors (e.g., endowment funds, pension funds, and insurance firms). If the pendulum continues to swing back toward more regulation, it will also become harder to launch and manage a hedge fund.
Many small and mid-size hedge funds are struggling to attract new funds from investors. “Almost all the new money flowing into the hedge-fund industry is going to giant multi-strategy investments,” according to “Hedge-fund consolidation to continue in 2023,” an article published by IG Prime. “Overall risk tolerance has declined, leading institutions to focus allocations on well-established funds that have successfully navigated much of the 2022 volatility…That has made it difficult to launch new funds: last year, launches fell to levels not seen since the global financial crisis.” IBISWorld predicts that the majority of firms exiting the industry will have assets of less than $100 million, “and growth will come from new funds by industry leading managers. Other small funds will be forced to consolidate.” Additionally, investors are demanding lower fees and many hedge funds are complying, which is reducing industry profit. Traditionally, management fees hovered around 2.0 percent, and average incentive fees were 20 percent. But in the second quarter of 2022, average management fees were 1.36 percent, according to Hedge Funds Research. Incentive fees were 16.05 percent in the fourth quarter of 2021. “Inconsistent returns are the key reason hedge fund fees have been falling steadily over the last 10 to 15 years,” according to Forbes. “Other critical reasons include many hedge funds providing long-only or beta-type returns, competition from other investment products with lower fees, and investors becoming more sophisticated and demanding.” In addition, consulting firm Grant Thornton reports that “investors are requesting more nontraditional solutions for managing the risks of their portfolios, such as requesting managed accounts and stand-alone funds.”
Demand will continue for skilled hedge fund professionals. Job opportunities for financial and investment analysts who work for funds, trusts, and related firms are expected to grow by 23.4 percent from 2022 to 2032, according to the U.S. Department of Labor, or much faster than the average for all careers. In addition, staffing firm Randstad listed the occupation of financial analyst as an in-demand career in its 2023 Finance & Accounting Salary Guide. It says that analysts “will increasingly need to possess competency with AI, machine learning, and data science as the role transforms. As more tasks continue to be automated, financial analysts will start taking on more strategic duties.” The careers of staff accountant, accounting manager, and controller were also cited as being in strong demand.
Required skill sets are changing—especially at quantitative firms, but also at any firm that uses data analytics, artificial intelligence (including machine learning), and other technology in its front, back, and/or middle offices. “With hedge funds increasingly using alternative data and algorithms to help unearth investment ideas, and cryptocurrencies continuing to garner interest, computer coding, data science and AI expertise are now in high demand across strategies,” according to Hedgeweek. It also says that “tech-based expertise is now a key battleground in hedge fund staffing, expanding far beyond the computer-based quantitative space in recent years, as managers running traditional fundamental and discretionary-focused strategies also look to draw on the alpha-generating opportunities offered by the avalanche of alternative datasets and algorithm processes in the hunt for yield.”
Spencer Stuart, a global executive search and leadership consulting firm, says that growth in the hedge fund industry has “made the sector a draw for high-profile traders and portfolio managers and, increasingly, for top talent in functions such as sales and marketing, investor relations, legal, operations and technology, finance, risk management, and human resources.” Spencer Stuart believes that a “shortage of top talent could be a greater impediment to growth at successful firms than access to capital.” Hedge funds that recognize this reality and effectively manage current employees and attract top performers for new positions will be best prepared for long-term success in this highly competitive sector. In recent years, there has been a strong focus on employee retention because of high retraining costs, loss of expertise and revenue generation, and other factors when valued employees exit hedge fund firms. In fact, 75 percent of alternative fund managers surveyed by EY in 2022 said that talent retention was their primary talent management goal, followed by hiring, recruiting, and onboarding talent (52 percent), ensuring an inclusive culture (41 percent), and increasing diversity (38 percent).“The ongoing demand on talent has elevated talent management as a major concern for managers and investors alike,” according to “Can resilience shape a shifting landscape?” an article published by EY. “To combat the problem, managers are applying a multipronged approach to improve talent retention by increasing compensation, prioritizing diversity and inclusiveness, and expanding flexibility, job roles and responsibilities.”
Overall, the hedge fund industry continues to compete with the private equity, venture capital, investment banking, and other industries for the most skilled workers. Pensions & Investments reports that “demand for talent has led to millions of dollars in signing bonuses, a higher cut of trading profits and payouts for non-compete periods becoming a norm as the hedge funds tap into a limited pool of eligible candidates.”
A growing number of hedge funds are seeking to poach new employees from Silicon Valley. Dice.com reports that hedge fund firms are “actively hiring candidates with artificial intelligence and machine learning experience from the likes of Facebook, Apple, Amazon, Netflix and Google…and luring them across with big pay packages. If a candidate has a Ph.D. in the right subject from Stanford, Caltech, MIT, NYU-Tandon, or an Ivy League university, and internships at Apple, Netflix, Google, Facebook or another Silicon Valley giant, then they can get an offer in the $350,000 range right off the bat.”
Salaries for hedge fund professionals rank among the highest in any industry. The average portfolio manager earned total compensation (including bonuses, commissions, and options) of $1,422,784 in 2018, according to Institutional Investor’s All-American Buy Side Compensation report. Research analysts had total average income of $678,189. (These are the most recent statistics available that provide detailed information about compensation.) The most-experienced and highest-skilled hedge fund managers and analysts will continue to enjoy lucrative earnings as hedge fund firms compete for top performers. It’s important to remember that only the most skilled managers at highly successful funds make such lofty incomes. Glocap Search LLC reports that analysts straight out of college with an MBA and little or no prior hedge fund experience earn base salaries of $90,000 to $120,000. Support staff earn much lower salaries. For example, hedge fund accountants earned salaries that ranged from $54,000 to $115,000 in June 2023, according to GlassDoor.com. They received an average salary of $78,100.