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People alpha key to delivering returns, says Citi Prime Finance survey

Date: Wednesday, October 23, 2013
Author: Citi Prime Services

Hedge funds that invest more in people management tend to deliver higher average returns than their peers, according to a study by Citi Prime Finance.

Citi Prime Finance’s analysis of smaller to mid-sized firms with between 50 and 150 employees revealed a 600 basis points difference in returns between hedge funds that had a strong focus on people management and those that did not.  

A number of academic studies on corporates have repeatedly shown that investing in an organisation’s workforce often leads to superior performance, and hedge funds are not exempt from this.  The Citi study emphasised - in what it referred to as “people alpha” - would soon start to become a major differentiator between hedge funds.

“Just as hedge funds once claimed ‘operational alpha’ as a differentiator, we believe that ‘people alpha’ will separate some firms from the pack and will soon become an industry norm,” said Sandy Kaul, global head of business advisory services at Citi Prime Finance in New York.

The study highlighted talent retention was key to success and advised firms develop an “interactive culture” and offer a decent benefits package, flexible workplace arrangements and workplace perks. Firms, which scored highly on talent retention also generally had stronger approaches towards talent acquisition, namely through robust internship programs and actively recruiting a diverse workforce.

Other best practices to help ensure a strong workforce included leadership training, mentorship programs, on-going coaching for management teams and peer reviews, the Citi survey added.  

Kaul said sophisticated investors will eventually start to incorporate hedge funds’ people management into their due diligence processes.

The survey stressed effective people management would help ensure the longevity at hedge fund businesses. Succession planning is fast becoming an important issue for investors as a number of high-profile hedge fund managers are nearing retirement age.  However, these transitions can go smoothly, as was evidenced at DE Shaw and Renaissance Technologies, whereby the future leadership was groomed into the top positions.

Citi polled 24 hedge funds with collective Assets under Management (AuM) of $169 billion.