Hedge fund firing rates

ricer362's picture
Rank: Monkey | 45

I wanted to see what knowledge anyone can share about the firing rates at various types/sizes of hedge funds. I know this will depend a lot on performance in a given year, so it would be interesting to get a sense of what the rate looks like in a good year, bad year, average year. Have heard rumors that many shops have a blanket "fire bottom 20% each year" policy etc., so wanted to see how accurate/widespread that sort of policy is. Would also be interested in how the firing is distributed by role.

Thanks very much for any info on this - didn't see a consolidated thread about this, and have heard contradictory information on this topic, so would guess it is a question others might be curious about.

Hedge Funds With Lowest Turnovers

Firing rates among hedge funds vary depending on what type you work for. Firing rates typically range from 10% - 20% of the bottom performers depending. Usually, you have up to a year to prove yourself and if you are fired, there is normally a severance of some sort.

User @IlliniProgrammer describes how non-compete clauses work in his part of the industry though it is by no means universal:

Many hedge funds and prop shops have lengthy non-competes, and the law normally requires them to pay you during this period. So if this question is being asked out of risk-aversion, don't worry. One of my friends got laid off from SIG a couple of years ago, and it turned out to be a free three-year paid vacation for him. He landed another buy-side gig fairly easily after that, and in the meantime, he got to go everywhere from Nigeria to Antarctica to Thailand to Switzerland.

Otherwise, just do your job, make sure the stuff that you work on reflects your competence and excellence, and try to learn as much as you can about how the firm makes money- and how to contribute to that. And remember that getting laid off isn't like getting expelled from school. Getting expelled implies you're a screwup; most people in our industry will get laid off at least once (maybe twice) during their careers. The analogy to getting expelled would be getting fired for cause, and that's probably actually a little less likely at a hedge fund than it is in a sell-side S&T role. (I would argue that there are more opportunities to prove you are a screwup on the sell side.)

I do think 20% is a high number. 10% may be more typical. At an I-Bank, they'll often get rid of the bottom 5% every year anyway (GS is a good example, IIRC). Since this is buy side (or sell side) finance, the vast, vast, majority of these people land on their feet....SIG, Bridgewater, Citadel, Kepos, DE Shaw, Two Sigma, Getco (prop shop), TMG (prop shop) all make their researchers sign non-competes. That's hardly everyone, but it's hard to call it a narrow segment of the buy side when they control a good chunk of AUM, are some of the biggest employers and have some of the biggest recruiting presences on college campuses. (I am making the assumption that OP could be a college student but I could be wrong.). In any case, SIG is famous for its ridiculous three-year non-compete. Nearly everyone has to sign it, and recruiters all know about it and don't see any selection signal in three years of unemployment (though there are still some currency issues).

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Comments (23)

Best Response
Nov 9, 2014

Many hedge funds and prop shops have lengthy non-competes, and the law normally requires them to pay you during this period. So if this question is being asked out of risk-aversion, don't worry. One of my friends got laid off from SIG a couple years ago, and it turned out to be a free three-year paid vacation for him. He landed another buy-side gig fairly easily after that, and in the meantime he got to go everywhere from Nigeria to Antarctica to Thailand to Switzerland.

Otherwise, just do your job, make sure the stuff that you work on reflects your competence and excellence, and try to learn as much as you can about how the firm makes money- and how to contribute to that. And remember that getting laid off isn't like getting expelled from school. Getting expelled implies you're a screwup; most people in our industry will get laid off at least once (maybe twice) during their careers. The analogy to getting expelled would be getting fired for cause, and that's probably actually a little less likely at a hedge fund than it is in a sell-side S&T role. (I would argue that there are more opportunities to prove you are a screwup on the sellside.)

I do think 20% is a high number. 10% may be more typical. At an I-Bank, they'll often get rid of the bottom 5% every year anyways (GS is a good example, IIRC). Since this is buyside (or sellside) finance, the vast, vast, majority of these people land on their feet.

So relax. Please don't embrace the possibility of failure but don't be terrified of it either.

    • 5
Nov 10, 2014

Like any small business, it varies with the personality of the owner. Some funds care a lot about retention and try to keep people for the long term. Some funds will fire an analyst or PM as soon as P&L drops below a predetermined level, no questions asked. It's correlated with the investment horizon of the fund - there are exceptions of course but the more long-term the orientation of the investment approach, the personnel philosophy tends to be similar.

IlliniProgrammer:

Many hedge funds and prop shops have lengthy non-competes, and the law normally requires them to pay you during this period. So if this question is being asked out of risk-aversion, don't worry. One of my friends got laid off from SIG a couple years ago, and it turned out to be a free three-year paid vacation for him. He landed another buy-side gig fairly easily after that, and in the meantime he got to go everywhere from Nigeria to Antarctica to Thailand to Switzerland.

This is not at all correct. Long non-competes are not typical in fundamental strategies, and in most states non-competes are generally unenforceable anyway. Severance is not the norm except at very senior levels, and there certainly isn't any legal requirement to pay former employees for years after letting them go. Generally speaking, it's hard to land another buyside gig after a long period of unemployment as well. Perhaps your friend leveraged his unemployment compensation and savings wisely. There may also be a few narrow examples of quant funds with a proprietary codebase and significant IP that have different compensation agreements.

Nov 10, 2014

They're pretty darned common in quant strategies (which hire college kids) and are enforceable for work previously done in IL, NY and PA *if they pay you during the non-compete period*. The big exception is CA, which is why our fund does not hire people to work there. However if you move to CA from previous work in NY they can still sue you or get an injunction from an NY court. The vast majority of our college hires had to sign non-compete agreements, and the story is similar for friends of mine who went to work in systematic strategy at other hedge funds. From what I have seen (both at my firm and others), most funds exercise non-competes in a layoff.

SIG, Bridgewater, Citadel, Kepos, DE Shaw, Two Sigma, Getco (prop shop), TMG (prop shop) all make their researchers sign non-competes. That's hardly everyone, but it's hard to call it a narrow segment of the buyside when they control a good chunk of AUM, are some of the biggest employers, and have some of the biggest recruiting presences on college campuses. (I am making the assumption that OP could be a college student but I could be wrong.). In any case, SIG is famous for its ridiculous three year non-compete. Nearly everyone has to sign it, and recruiters all know about it and don't see any selection signal in three years of unemployment (though there are still some currency issues).

In any case, if it helps to settle this issue, OP will receive a detailed contract if he is subject to a non-compete, before he signs up to work at that firm. Read it carefully, and show it to a lawyer. If OP has not received a non-compete, he is not subject to one. If he has, and he works there for more than a few months, he can usually expect that the non-compete will be enforced in a layoff. They don't want you taking their IP to another firm.

Nov 10, 2014

Like I said, quant shops with significant IP are different. This is a good example of why "hedge fund" refers to a legal structure, not an asset class or an industry really. No idea of OP's situation, but my comments apply to the vast majority of investment professional roles outside of quantitative research. Even at the places you mentioned, you're focusing on a narrow role that isn't known for its turnover anyway. My point is that even a broadly written non-compete won't hold enough water to prevent someone from going to work in a different part of the industry. There's plenty of precedent keeping folks from taking code to another firm, but no matter what they put in the employment agreement, SIG would have a very hard time preventing e.g. one of their Equity Research Analysts from going to a fundamental long/short fund.

Nov 11, 2014

Like I said, quant shops with significant IP are different. This is a good example of why "hedge fund" refers to a legal structure, not an asset class or an industry really. No idea of OP's situation, but my comments apply to the vast majority of investment professional roles outside of quantitative research.

Fair enough, but does your fund have organized recruiting for undergrads? Most of the college hires that I'm aware of are heading to firms with these IP issues.

My point is that even a broadly written non-compete won't hold enough water to prevent someone from going to work in a different part of the industry.

The CEO of Teza Technologies could have really used your lawyer a few years ago. :D I'm pretty sure a broad non-compete is enforceable in NY, PA, or IL if they pay you a salary during the non-compete period. Or at the least if it's enforceable for Misha, it's probably enforceable for average Joes like you and me with brilliant but not genius lawyers.

Even at the places you mentioned, you're focusing on a narrow role that isn't known for its turnover anyway

Our firm hired 22 college graduate hires this year. I believe all of them signed non-competes. Most of them will stay for more than 3 years but fewer than 10; some of them will get laid off while others will want to leave for jobs elsewhere; in all cases the non-compete will be a significant fraction of the time they spent at our firm. I hear similar stories from my friends at other firms, although to be fair, few of them are on the purely fundamental side of the business.

There may be something completely different going on at your fund and your part of the industry, but I think it's an overreach to try and characterize the exceptions to your rule narrowly when several of the world's largest hedge funds seem to be making most or at least large segments of their new hires sign them. I was obviously incorrect for implying that non-competes applied everywhere or perhaps even in most places, but they do apply in some places and as universally within my field of view as they are completely absent from yours'. So my point is that depending on what OP is looking for, the odds of him running into a non-compete may very well be non-negligible or even very high.

A broad non-compete without geographical limitations requires them to pay you during the non-compete period - otherwise the courts will throw it out so you can earn a living. It's a paid 6, 12, 24 month mandatory vacation. Get a pilot's license from the FAA, rent a Cessna, and travel the country. If you get bored, fly somewhere else. Or rent a moderate sized sailboat and sail from Alaska to Chile. If you're still bored at the six month mark, ask them to waive the non-compete for working at Google or Palantir or at a PE firm. (They'll waive it for a firm that clearly isn't a competitor).

    • 1
Nov 15, 2014

+1.

Long story short, you have [up to a year] to prove yourself.

Nov 11, 2014

And my point is merely that most non-competes aren't actually enforceable if you want to go work for Google or a PE firm or whatever. You don't need a waiver and you don't have to worry about needing to do nothing or leave the business altogether for a few years if you get fired. Doesn't matter what your entry-level analysts are signing; you won't be able to stop them from continuing to work in parts of finance that clearly aren't directly competing, which as you point out no one wants to do anyway. It's just an irrelevant thing to worry about, that's all. Your lawyers, like any good lawyers, drafted broad NDA provisions to protect your trade secrets, but they won't deprive anyone of their livelihood which I think was OP's concern.

Now, you clearly can't go start a competing HFT firm in the state of IL. But no non-compete would have stopped Misha from, say, working as an analyst at Pershing Square if that had been his thing. A good summary on non-competes: http://www.hrexaminer.com/is-your-non-compete-agre...

Also, you'r right that I'm not focusing on undergrad hiring. Most investment professionals with P&L responsibility are not fresh out of undergrad. If it's just a college kid worrying about job security I guess we're wasting time.

Nov 11, 2014

FIRING RATES GONNA BE PRETTY HIGH THIS YEAR

    • 1
Nov 11, 2014
whatwhatwhat:

FIRING RATES GONNA BE PRETTY HIGH THIS YEAR

insight has been provided

Nov 15, 2014
HFer_wannabe:
whatwhatwhat:

FIRING RATES GONNA BE PRETTY HIGH THIS YEAR

insight has been provided

Don't know why any additional insight is required... with the breaks on couple relatively safe deals this year, especially shire, and the hedge fund trade/risk asset unwinds that followed, it's not hard to imagine a bunch of funds being in at least warm water. Think it's pretty obvious.

Nov 15, 2014

From what I've seen no rule of thumb, not as bad as the banks but it's not a stable cushy job. Especially larger complexes... Same pressures to cut costs etc as large banks esp in bad years.

Nov 15, 2014

I have never heard of a non-compete that included pay during the entire period. Generally if you get fired you get some sort of severence package but the firms that have lengthy non-competes most certainly do not give you years of full pay to go along with your dismissal. And although they may not be enforceable, most firms will make a show of attempting to enforce them and they can flex more legal muscle then most employees can and so therefore they usually "stick". Oftentimes, however, part of the firing process is negotiating down the non-compete which can and does happen

And to answer the original question, the hedge fund industry is very large and diverse and so turnover is highly variable.

Nov 15, 2014
Bondarb:

I have never heard of a non-compete that included pay during the entire period. Generally if you get fired you get some sort of severence package but the firms that have lengthy non-competes most certainly do not give you years of full pay to go along with your dismissal. And although they may not be enforceable, most firms will make a show of attempting to enforce them and they can flex more legal muscle then most employees can and so therefore they usually "stick". Oftentimes, however, part of the firing process is negotiating down the non-compete which can and does happen

And to answer the original question, the hedge fund industry is very large and diverse and so turnover is highly variable.

I've seen three US non-competes and all of them had the firm paying the employee for the non-compete period.

You will find these kinds global unrestricted non-competes at DE Shaw, Jump Trading, Citadel, and Getco, Two Sigma, SIG, and occasionally also find paid gardening leave at the large banks at the more senior levels.

The one takeaway from this thread is that hedge fund is a very vague term. There's the quant funds, there's global macro, there's fundamental investing, I'm sure there's a lot of other stuff out there- I only know my area and even then I only know a small part of it. At the quant funds, most firms have proprietary stuff that they do not want people walking out the door with and trading off of at another firm. On the sell-side, the firm's competitive advantage is in client relationships rather than IP, so a limited non-compete for a salesperson might make sense, but otherwise there isn't a whole lot to bring with you to the next firm.

Nov 15, 2014

I am still very sceptical that this is correct. I personally know people who have gotten fired from some of those names you mention above and I never heard of paid time during the non compete above the normal separation package. What if they get another job out of the industry? Usually when people get fired from places with tough non-competes they are either already rich enough that they can take a couple of years off or they go get another job in a related field that isn't covered by the non-compete...ie a hedge fund guys takes a sales job, etc. I personally have a pretty strict/draconian sounding non-compete and it doesn't have any provision for paying me during that period.

Nov 15, 2014

I heard some funds ran into some mild trouble in Q3. I heard that one of the big quant funds broke a long winning streak in their Q3 returns, but I can't find anything in the news about that, so I'm not going to say which firm. Mind you my neck of the woods is a pretty dense part of the forest, and I lost my rather thick glasses so I don't know.

I think the recent spike in volatility was an opportunity to correct some mispricings, and October may look a lot better at some firms than prior months.

I can't talk about what we are doing, I can only speculate about what is going on elsewhere, and I am going to get bitch-slapped by Bondarb if I speculate too much. So that's all I have to offer on the job security front over here.

Nov 15, 2014
IlliniProgrammer:

I heard some funds ran into some mild trouble in Q3. I heard that one of the big quant funds broke a long winning streak in their Q3 returns, but I can't find anything in the news about that, so I'm not going to say which firm. Mind you my neck of the woods is a pretty dense part of the forest, and I lost my rather thick glasses so I don't know.

You sure it's Q3? Pretty sure it's mid Oct. Bunch of quant funds got hit.

Nov 15, 2014
bearcats:

You sure it's Q3? Pretty sure it's mid Oct. Bunch of quant funds got hit.

Well, we're hearing from the sellside that 2014 has not been a good year for quant funds and Q3 was not good at all either.

My model of the world is that volatility increases deliver an initial hit to PNL on most strategies, but then deliver a lot of opportunities to correct mispricings, especially if the market is stressed enough to deliver these mispricings but not stressed enough for liquidity to completely dry up. So the sweet spot is when the VIX is staying between 15 and 30. This model could be completely wrong, although it could also be compatible with a lot of volatility and perhaps wider differences in returns for October.

But perhaps October was an ugly month. I spend most of my time buried in stats and code- aside from the occasional sell-side visit I don't get out very much.

Nov 15, 2014

My view is that the hiring environment in my part of the hedge fund world (macro) is very strong right now. Yes there is turnover as always, but the bigger funds have more capital being thrown at them then they know what to do with and the sell-side no longer really creates potential talent anymore as trading at the banks has declined so much. Obviously some big name funds have had very bad years but the ones who haven't are hiring aggressively. Also, the markets have "opened up" in the last couple of months and for those who weren't stopped out it has been a good time for macro trading.

Nov 16, 2014

So I guess the question is whether and to what extent you saw redemptions. If your investors pulled out when the VIX was up and various strategies were in a moderate drawdown, I can see how that would hurt the monthly PNL number although to be fair the investors who stuck it out are hopefully up. If you lose 10%, half your funding goes away, and you're up 15% after that, it might be unfair to characterize it as a monthly loss But the funding aspects of the larger firms is well above my pay grade.

As an aside, the head of PRINCO was talking last year about how Princeton, Yale, and some of the other endowments were sometimes offering contractual agreements to invest during a liquidity crunch in exchange for lower fees. I think this is really a win-win for both the various buy-side funds as well as the endowments. On the one hand, the endowment's investment horizon is O(100 years). On the other hand, hedge funds (not to mention VC firms and PE firms) need people to invest at the end of a long drawdown- which incidentally often happens to be a better than horrible time to buy into the strategy.

If you deal with investors and have college endowments who want to negotiate lower fees, this might be something to think about. And getting super-liquid investors into the markets at the very bottom is really a win for everyone.

Nov 16, 2014
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Nov 17, 2014