Home Hedge Funds Inside the Rise of the Hedge-Fund Business-Development Professional

Inside the Rise of the Hedge-Fund Business-Development Professional


Imagine for a moment a bizarro world in which your favorite professional sports league expands — not just by a couple of franchises, but by a factor of two. Interest in the NFL, let’s say, erupts after the wedding of Taylor Swift and Travis Kelce-Swift, permanently cementing the flirtation of two global fan bases and resulting in a bidding war for TV rights. Five years from now, the league has more than 60 teams instead of 32.

The knock-on effects would be plentiful and weird, but at the most basic level, more players — quarterbacks, linebackers, wide receivers — would be needed to fill out rosters and compete on the field. General managers and scouts, already critical if under-the-radar keys to a franchise’s success, would gain newfound importance as competition for a finite number of elite players intensified. (There were fewer than 20 good NFL quarterbacks before expansion.)

That scenario is not unlike what has played out in the world of multimanager hedge funds — which includes investment firms like Citadel, Millennium, and Point72 — with scores of trading teams that diversify their bets across all manner of strategies. While growth in both assets and staffing in the hedge-fund industry as a whole has been muted over the past five years, the pod shops have exploded. From 2019 to mid-2023, assets under management at multimanager hedge funds swelled from $170 billion to $370 billion, a Goldman Sachs research report found, while head count grew by 80% to 18,100.

The talent war that has broken out over top portfolio managers — including $50 million guarantees that star athletes would envy — has been widely documented. Less well known are the men and women behind the scenes helping fuel these pay packages, so-called “business development” professionals. Unlike business development in corporate America, which focuses on growing a company’s prospects with partners and clients, hedge-fund BD teams specialize in scouting and evaluating investment talent.

BDs have been quietly gaining power, growing in numbers, and earning multimillion-dollar paychecks at hedge funds by assembling winning trading teams, the lifeblood of the industry. They can be found at all kinds of hedge funds and proprietary trading firms, but have been key to the meteoric growth of the multimanager hedge fund, now the industry’s dominant players.

BD professionals have played an unheralded role in the metamorphosis of the multimanager, facilitating their recent growth spurt but also contributing to an acceleration of expenses that has alarmed investors. Some say the pod shops have created a talent bubble — not a war — with perverse incentives for BD teams to hire with reckless abandon, diluting the investment talent pool and driving up costs.

High costs can be perilous to these funds. Investor redemptions can set off a “death spiral,” as some sources put it, necessitating quick action to stabilize the fund. And after a rocky 2023 in which some firms failed to beat the returns of US Treasurys, investors are grumbling and scrutinizing costs.

Even so, the multimanager space, now more than 50 firms strong, continues to attract money, and new launches are emerging with their own personnel needs. That’s puffing even more air into the investment-talent bubble, but it’s also swelling the BD profession’s ranks and driving up the value of experienced operators.

“Business development is its own animal,” said one senior headhunter who’s seen a surge in BD moves and mandates in recent years. He asked to remain anonymous to protect business relationships. “They spend money on these people like crazy, offering easily into seven-figure salaries to join.”

This BD job was never that sexy, and all of a sudden, this is a profit engine.”

Business development is the type of job people fall into by chance rather than dream of as starry-eyed undergrads. It requires a blend of technical investment knowledge and a salesman’s charm, hustle, and social élan. The once niche gig at hedge funds has increasingly become a must-have role, according to conversations with hedge-fund execs, senior BD professionals, and headhunters who regularly work with BD teams, some of whom asked to remain anonymous because they weren’t authorized to speak on behalf of their companies or wanted to protect business relationships.

The largest multimanagers now have sophisticated recruiting operations, which some industry insiders liken to the recruiting armies at college football powerhouses like the University of Alabama. Humming in the background of Nick Saban’s championship runs was a recruiting machine, with specialists churning out a steady flow of elite football players in every position.

Large firms, including Citadel, Millennium, Balyasny, and Point72, now have BD units with dozens of people who focus on recruiting elite traders in every strategy and the analysts and researchers necessary to run their teams. Many of their smaller competitors have followed suit in investing in BD teams.

Senior BD professionals now commonly earn more than $1 million annually, with some top execs making north of $5 million, BD execs and headhunters familiar with the market said. Midlevel BD professionals can earn $500,000 and $700,000, these people estimated.

Based on BI’s tracking of industry moves, more than 20 senior BD professionals have joined, left, or earned promotions to top roles at multibillion-dollar pod shops since 2023.

Job duties vary from firm to firm, but in addition to entertaining and wooing candidates, BD execs map the universe of traders involved in a strategy. They vet the performance of traders and their reputations with industry contacts and even law enforcement. They construct offers and project when a hire might break even. They onboard PMs, and help marshal resources for their pods.

“This BD job was never that sexy, and all of a sudden, this is a profit engine,” a senior hedge-fund headhunter said.

Ken Griffin speaking on a stage

Ken Griffin, Citadel founder

Michael Kovac

A whole cottage industry of headhunting firms exists to help hedge funds source investment talent, and even firms with sizable BD teams still spend millions paying outside recruiters. Some in the industry remain dubious that business development’s benefit outweighs its escalating price tag.

“Some have cultivated really good images, and that in and of itself is a skill. But almost all of them could be replaced, and the funds wouldn’t miss a beat,” said one senior hedge-fund consultant, who asked to remain anonymous to protect business relationships. “They don’t like to think they can be — and that’s their ego. Whether you’re internal BD or the best of external search, you’re replaceable.”

So why bother with a BD team at all?

Historically, a hedge fund’s chief investment office or senior portfolio manager was responsible for vetting and wooing key investment hires. They have the expertise to understand a trading strategy’s nuances and whether a PM will fit within the fund’s culture. When you’re hiring a few people a year, this works fine. At scale, though, it quickly becomes untenable, distracting from the all-important matter of investing.

Two hedge-fund execs told BI that an advantage provided by a BD team — especially at multimanagers, which have more sprawling rosters than other hedge funds — is that they allow senior investment staff to focus more on the markets and managing money. They can also help hedge funds save on outside recruiting costs, which can add up to tens of millions a year.

“They’re freeing up time for our CIO, which in many ways is the most expensive unit of time in the business, and they’re freeing up the reliance on headhunters,” said one of the execs said, adding that building a BD team ultimately reduced costs to investors.

“The key people are true investment managers” who stress test strategies, gauge risk, and understand what a PM’s allocation and drawdown limit should be, said one senior search exec. “It’s evolved tremendously.”

BD personnel also offer the benefit of monogamy and investment in the firm’s long-term success.

“I’m as valuable to you for the people I tell you not to hire as the people I tell you to hire. That’s the real quintessential difference between a recruiter and a BD person,” a current BD exec said, noting that BDs may have an ongoing relationship with a PM while recruiters never have to see them again.

2008 was a seminal year for hedge-fund business development, a time when just a handful of pod shops — vastly smaller in number and size — were starting to focus on the role.

A handful of people who are top BD execs today got their start at multimanagers in 2008, including:

  • Jennifer Blake, who joined Balyasny, where she’s now global head of BD

  • Thomas DeAngelis, who first joined Balyasny in investor relations and recently left Citadel to lead BD at Walleye Capital

  • Paritosh Singh, who joined Millennium, where he’s now global head in the Americas

  • Michael Grad, who first joined Millennium and is now the global head at BlueCrest

  • Lindsay Previdi, who first joined Point72 and recently left Citadel to lead BD at Freestone Grove

Matthew Giannini, a senior BD exec at Citadel, might be considered an honorary member of the class of ’08, having started at Ken Griffin’s fund in December 2007.

Back then, there was no established pipeline for the position. Hedge funds targeted institutional salespeople at investment banks with exposure to hedge funds, as well as asset allocators with chops in portfolio-manager selection and due diligence. External headhunters became another common BD hunting ground, as did traders and PMs who wanted —  or needed — a break from risk-taking.

In the early days, the job was “a little easier but also a little messier,” recalled one hedge-fund exec, who was not authorized to speak publicly. You spent your days meeting sources over meals, drinks, and golf outings, compiling anecdotal data points about which traders were “crushing it” — “a lot of fluffy buzzwords and maybe not a ton of underwriting, substance, or specifics on how they did it.”

The job grew more sophisticated as the hedge funds grew larger and more complex. Along the way, the terms “recruiting” and “talent acquisition” fell out of vogue in favor of “business development” — a recognition in part that BD professionals do more than just source PMs and that they report to investment executives rather than HR.

The multimanager-hedge-fund boom really took off in 2018, the year two new giants emerged on the scene: ExodusPoint accumulated a record-setting $8.5 billion for its launch in the summer of 2018, and Point72 relaunched after its ban on managing outside money ended, quickly amassing $5 billion.

Assets continued to pour into multimanagers. And with some of the top players closed to new capital — Citadel and Millennium locked capital up for multiyear periods and gave back billions to investors — the money has flowed to competitors. Many firms — including Balyasny, Brevan Howard, Hudson Bay, Schonfeld, Verition, and Walleye — grew exponentially.

Growth in assets at multimanager hedge funds

Assets at multimanager hedge funds have boomed since 2018.

Goldman Sachs Prime Services

Based on list of BD hires and moves compiled by BI, every major multimanager launched or expanded its BD team in the ensuing years.

“Once these firms keep raising assets, they need more PMs. How do you get more PMs? Hire more BD people,” one hedge-fund exec said.

If you build it, they will come. The principle may work for fictional baseball diamonds, but the reality at hedge funds is more complicated.

To keep up with the billions investors were showering them with, some firms took the Costco approach, hiring in bulk. Hedge funds started reaching and taking more chances — on unproven sell-side traders, on PMs with spotty track records, and on analysts still wet behind the ears.

“You cannot rush a harvest. You can’t just Amazon Prime a multimanager.”

The result has been a dilution of the investment talent pool as the number of PMs needed to “feed the BD beast” increased, as one insider put it — a direct result of having too many assets.

During ExodusPoint’s breakneck buildout, the firm hired 100 people and 50 portfolio managers in its first year, interviewing candidates while wires still hung from the ceiling.

ExodusPoint brought over stud PMs in fixed-income trading — the métier of the firm’s founder Michael Gelband — including the star rates traders Jonathan Hoffman and Alexander Phillips. But staffing its equities business was a struggle. The firm invested in bringing aboard quant portfolio managers, but, as BI previously reported, it took flyers on relative unknowns and overpaid to reel them in — one of the realities of a startup fund. WestWind, ExodusPoint’s highly touted long-short stock-picking unit, was mothballed in late 2022 after less than a year of trading.

The firm has only managed mediocre returns so far, dogged by subpar performance from its equities strategies.

Compounding the shortage of PMs has been the proliferation of noncompetition and nonsolicit agreements, which have grown lengthier and stricter in recent years. Millennium’s Izzy Englander said at a conference last fall that hedge funds are not facing a talent war but a “talent bubble” and blamed noncompetes for creating an artificially smaller landscape of potential hires and driving up their price.

“The ability to move someone has gotten significantly harder,” one of the hedge-fund execs said. “The dollars, the guarantees to move someone, have gone through the roof.”

The FTC’s recent ban on noncompetes — which business groups are challenging — could disrupt this trend.

In the current environment, multimanager funds have had little choice but to bulk up their BD teams to stay competitive. But more bodies don’t guarantee results. Winning over elite PMs often comes down to relationships and waiting for a catalyst for them to move, both of which can take years to develop.

“We want the same superstar players with experience who can put up hundreds of millions,” one BD exec said. “The punchline is, you really have to develop relationships over years to get somebody to the table.”

Israel Englander of Millennium Management LLC stands for a photograph

Israel Englander of Millennium Management

Amanda Gordon/Bloomberg via Getty Images

To fuel the BD boom and the war for talent more broadly, multimanager hedge funds have had to change how they charge their investors.

Unlike the traditional fee model — charging 2% of assets and 20% of fees — the pass-through fee structure allows the fund to charge all of its expenses to investors, including recruiting costs and payouts to star traders. Costs are more than double — typically around 5% — and can creep up toward 10%, depending on the firm.

“It’s a magical model. And when returns are good, clients are not unhappy,” one senior headhunter said.

Once a rarity, the pass-through has become the dominant model. The Goldman Sachs study found that 73% of multimanagers had a full or partial pass-through structure in 2023, up from 63% in 2022.

Those who’ve switched, according to Goldman, say “the primary concern was the ability to be competitive in talent acquisition” — which includes staffing up BD departments.

But when returns slump, investors start asking questions and scrutinizing costs. And while redemptions can leave any hedge fund fighting through quicksand, pass-through funds are more susceptible to a death spiral when firms don’t take decisive action.

With the pass-through model, the remaining investors shoulder an even greater share of the expenses when an investor bails, diluting returns and making it less enticing to stick around. Slashing costs may help but can also threaten returns if it compromises investment teams. It’s a big reason firms with enough investor demand have been locking up cash for longer.

Total time required for investors to redeem money from multimanager hedge funds.

Total time required for investors to redeem capital from multimanager hedge funds. Investor liquidity has reduced over time, according to Barclays.

Barclays Capital Solutions

A version of this script played out at Schonfeld last year — after rapidly accumulating billions in capital, performance flatlined, and redemptions ensued. After extensive cost cutting in 2023, the fund’s returns have bounced back.

Schonfeld wasn’t the only fund to struggle. Brevan Howard — which grew from 150 employees to 1,100 over the past five years — overhauled its BD operation and recently laid off staff after suffering losses. The investment giant Brookfield shuttered its multistrat fund. Paloma Partners restructured its business last September, and its CEO and co-CIO Neil Chriss exited earlier this month amid sluggish returns.

Multimanager firms in 2023 generally failed to live up to the hype for the first time since their boom began — putting some funds and the gaudy PM pay packages under a microscope.

“The LPs are starting to ask more questions about these deals,” said Harry Schwefel, Point72’s co-CIO and an employee since 2008. “And firms should be held accountable to their answers.”

The backlash provided a wake-up call for $5.7 billion Walleye, which transitioned to a multimanager in the late 2010s and, like many peers, hired in bulk. Last fall, it decided to reevaluate all of its business lines.

“If we don’t do this now, we won’t be in a position to compete,” Jonathan Brenner, Walleye’s global head of marketing and IR, said of the firm’s rationale. In November, it hired Thomas DeAngelis, formerly the global head of equities BD at Citadel, to carry out the mission.

DeAngelis’ marching orders as chief people officer included reversing the excesses and impulses of the talent war — he was given no hiring quota — and treating the firm’s resources with discernment, Brenner said. Who you decide not to hire or who you cut can be just as critical as who you recruit, and DeAngelis hasn’t been shy about shaking things up.

Walleye has overhauled its C-suite, replacing its heads of treasury, compliance, and legal. The firm’s head of volatility and its chief technology officer, partners who’d both been with the firm for nearly two decades, announced their retirement this month.

Walleye has exited trades where it has lacked a distinct advantage and doubled down on strategies core to the fund’s DNA, like volatility trading. The firm has hired roughly 60 people so far this year, including support staff to aid its existing PMs. But it also cut 12 people in March, including the head of its discretionary macro operation and its head of Europe, Middle East, and Africa, where growth outpaced returns, a person familiar with the matter said.

Walleye’s ambition is not to become the next Citadel, Millennium, or Point72, but to become the best midsize multimanager in the industry, growing to the $10 billion assets range at most, Brenner said.

And it won’t happen overnight. On DeAngelis’ first call with investors in late 2023, he was peppered with questions about the competition for talent, said one person who was on the call.

This person recalled DeAngelis saying: “You cannot rush a harvest. You can’t just Amazon Prime a multimanager.”

Super Bowl LVIII: Kansas City Chiefs Travis Kelce (87) hugs girlfriend and singer Taylor Swift

Super Bowl LVIII: Kansas City Chiefs Travis Kelce (87) hugs girlfriend and singer Taylor Swift following victory vs San Francisco 49ers at Allegiant Stadium. Las Vegas, NV 2/11/2024 CREDIT: Erick W. Rasco (Photo by Erick W. Rasco/Sports Illustrated via Getty Images) (Set Number: X164496 TK1)

Erick W. Rasco/Getty Images

The NFL’s relationship with American fans was on the rocks not too long ago. Ratings plummeted during Donald Trump’s presidency, with the league becoming a favorite Twitter whipping boy as players protested police brutality against Black Americans by kneeling during the national anthem.

But America couldn’t quit its favorite sport, and the NFL is once again a ratings bonanza, dominating live sports and notching its second-best ratings year ever in 2023.

Investors can’t quit pod shops, either. Five years after the multimanager boom began, more multibillion-dollar funds are emerging.

A recent Goldman survey of allocators indicated that demand from investors has cooled slightly, possibly in response to tepid 2023 performance, though also likely due in part to the billions these LPs have already invested in multimanagers in recent years.

When Goldman Sachs published its in-depth report on the multimanager space in 2022, it counted 39 firms. In its follow-up last September, it tallied 55.

More have entered the fray since. Freestone Grove — founded by the ex-Citadel execs Todd Barker and Daniel Morillo — started trading in January with $3.5 billion in commitments. Fortress tapped Jeff Runnfeldt, the former equities chief at Balyasny, as the CIO of its new multimanager. And Jain Global, founded by the ex-Millennium exec Bobby Jain, is expected to start trading this summer with as much as $6 billion in commitments, the most anticipated launch since ExodusPoint.

This means the ranks of business-development professionals will swell further, and competition to hire portfolio managers will intensify, further accelerating the talent bubble.

The associated expenses will continue to rankle some investors, and underperforming funds may come under fire. But when it comes to the top-tier multimanager funds, which have decades of strong performance to their names and capital locked up for years, few are likely to face any serious blowback.

One allocator recalled a dinner where a few large endowment managers were griping over a fund that had recently raised its already hefty fees. He asked what they were going to do about it.

“The answer I got was, effectively, ‘Well, I guess we’re going to pay more,'” he recalled. The net returns were too good.

Source link


Please enter your comment!
Please enter your name here