Hedge Funds Hire From Wall Street as Jobs Disappear, Pay Falls

Date: Thursday, June 19, 2008
Author: Elizabeth Hester and Katherine Burton, Bloomberg

Citadel Investment Group LLC, Tudor Investment Corp. and at least 20 rival hedge funds are taking advantage of job cuts and pay reductions on Wall Street to recruit top performers and expand into new businesses.

More than 45 traders, bankers, analysts and other executives have left the major investment banks this year to join hedge funds and private-equity firms, according to company releases compiled by Bloomberg. The count doesn't include people who departed to start their own companies.

While bankers have been making the move for the past five years on the promise of ever larger paychecks, executive recruiters say the pace has picked up. Among the best-known hedge-fund recruits in 2008 are Bill King, former co-head of global securitized products at JPMorgan Chase & Co., who is going to Chicago-based Citadel, and a five-person distressed debt team at Bear Stearns Cos. that is moving to Tudor of Greenwich, Connecticut.

``Investment banks were always considered to be more secure than hedge funds, but now that security isn't there anymore,'' said Keith Mann, managing director at Dynamics Associates, a New York executive-search firm.

Investment banks are taking less risk, cutting leverage and selling assets in the aftermath of the worldwide credit crisis that cost Bear Stearns its independence and has so far led to $396 billion of writedowns and credit losses since the beginning of 2007.

That means there's less money to be made on Wall Street. Morgan Stanley saw profit drop 57 percent in the second quarter on declines in trading, asset management and investment banking. Lehman Brothers Holdings Inc. reported its first loss in 14 years and Goldman Sachs Group Inc.'s earnings fell for a second straight quarter.

Pay Falling

The world's largest banks and brokerage firms have cut more than 83,000 jobs since July 2007, with Citigroup Inc. and Bear Stearns, which was bought by JPMorgan at the end of May, leading the reductions.

Pay packages for remaining Wall Street employees may fall as much as 20 percent this year as profits tumble, according to a survey of recruiters released June 3 by The Smart Cube, a Chicago research firm.

While managing directors on Wall Street earned an average of about $250,000 in salary in 2007, their bonuses, partially paid in stock, have declined in value. So far this year, the shares of Wall Street firms have fallen anywhere from 11 percent for JPMorgan to 62 percent for Lehman Brothers.

The retrenchment may leave Wall Street firms short of talent if their investment-banking and trading businesses begin to recover.

Talent Gap

``Investment banks won't suffer from departures now, but they will suffer in four or five years when they'll see a talent gap,'' said Henry ``Hank'' Higdon, managing partner at Higdon Partners LLC, a New York-based search firm specializing in financial-services companies.

While the collapse of the subprime-mortgage market and subsequent credit shortage have forced some hedge-fund firms to close, the $1.9 trillion industry is still growing, with net inflows of $16.5 billion in the first quarter, according to Chicago-based Hedge Fund Research Inc. Through the first five months of the year, hedge funds have returned an average of 0.11 percent, compared with the negative 8.2 percent return including dividends by the Standard & Poor's 500 Index.

Private-equity and hedge-fund firms are using the turmoil to expand. New York-based buyout firm Apollo Management LP in May hired Neal Shear, Morgan Stanley's former trading chief and second-highest paid executive, to start a commodities business.

John Paulson

Hedge funds generally earn 2 percent of assets under management and 20 percent of any returns they make, which can lead to paydays that dwarf those at investment banks. Last year, John Paulson, founder of New York-based Paulson & Co., led all hedge-fund managers with an estimated $3.7 billion in earnings after his Credit Opportunities Fund climbed almost sixfold, according to Institutional Investor's Alpha Magazine.

Lloyd Blankfein, head of New York-based Goldman Sachs, the world's most profitable securities firm, made $68.5 million last year.

Even relatively lower-paid employees can earn more from leaving securities firms. Analysts jumping from Wall Street to a hedge fund can double their annual compensation to as much as $4 million because they often share in a percentage of earnings from their investment recommendations to portfolio managers, said Alan Johnson, managing director for New York consulting firm Johnson Associates.

Kenneth Griffin

One of biggest beneficiaries of the Wall Street exodus is Citadel, the $22 billion hedge-fund firm run by Kenneth Griffin that has hired five senior executives from Wall Street firms this year. Three of those recruits came from New York-based JPMorgan, the largest U.S. bank by market value. In addition to King, the firm has hired Derek Kaufman to run its U.S. fixed- income division and Patrik Edsparr to head global fixed income and be chief executive officer for European operations.

Tudor, founded by Paul Tudor Jones, was one of the funds that scooped up talent from Bear Stearns, where 55 percent of employees lost their jobs after its purchase by JPMorgan. The distressed-debt team it hired is led by Gregory Hanley and Alan Mintz.

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Katherine Burton in New York at kburton@bloomberg.net