When selecting managers, both institutional and individual investors typically ask the right questions when it comes to “how” the firm does things – how the investment process works, how the strategy has performed over time, how the firm services clients once on board and how the business infrastructure addresses operational risk. Yet an equally important question when making an allocation decision is “who” – who are the people who are critical to the success of the firm? The hedge fund business is arguably one of the most competitive segments of the asset management industry when it comes to talent and the key driver of which firms succeed or fail is the people they are able to attract and retain. Yet, if you look at certain industry data, it is clear that hedge funds are facing real challenges when it comes to talent:
- Around a third of all hedge funds disappear within 3 years and the average life span for most hedge funds is less than 5 years (FT Alphaville). Most failures are due to lack of management oversight and operational risk as opposed to investment strategy. (Is Your Money Safe?)
- One third of the assets in the hedge fund industry are managed by firms where the founder is over 60 (or even over 70 in some cases) and another third of assets are managed by founders in their 50’s. Thus when and how a leadership transition will take place is clearly a pertinent question for investors.
- Unwanted turnover in the industry is above 20%. Firing people who are not performing is healthy in any competitive business environment. However, the costs associated with losing or under-utilizing top talent are extremely high and the consequences can often be disastrous.
- Only 3% of assets under management in hedge funds are managed by women. Minorities are also few and far between. Yet, according to some studies, women outperform men as investors over time because they tend to take less risk. (Hedgefunds Run by Women). While it is questionable if this is too much of a generalization, it is obvious that it is harder to find top talent if hiring is limited to only certain populations. There is clearly an opportunity for hedge funds to attract people that look and think differently and are outside of their immediate circle of known colleagues.
All these challenges come at a time when running a hedge fund has never been more complicated (Interview with John Casey). Faced with greater competition, increasing regulatory oversight, expanding technology and infrastructure requirements, and a slower economic environment with lower return expectations, hedge funds are under even greater pressure to attract, retain and develop top talent in all areas of their business and in particularly in positions of leadership. (Disrupt Investing)
To make sense of the talent issues in the hedge fund industry, I recently had a conversation with Carol Morley, CEO and Founder of the elite talent consulting firm, The Imprint Group. After spending over 20 years as a strategy consultant and executive recruiter specializing in the investment management industry, Carol created the Imprint Group because she saw the increasing importance of talent development in the asset management space and wanted to help leading firms address this need in a more methodical and rigorous fashion.
Stefanova: Carol, thank you for taking the time to speak with me. Your firm is unique as it is fully dedicated to helping investment firms maximize their talent. Why did you create The Imprint Group and what is the main problem you are aiming to solve?
Morley: We created The Imprint Group because we think leading asset management firms need to invest more in developing and retaining key talent in order to keep winning. Talent development will be an important new source of competitive advantage going forward and one that has largely been overlooked thus far.
When it comes to talent strategy, investment firms have historically focused on talent acquisition – that is, adding new people. They are accustomed to paying top dollar for strong talent, but then they leave money on the table by doing very little to leverage that talent to its fullest. Retention and development of top talent are equally important if a firm wants to continue winning in the future. Improving collaboration within and across teams is another opportunity to add “organizational alpha.”
When working with a new client, the first question we ask is “Who are your ten most critical people and how can they think bigger and perform better as individuals and collaborate more effectively as a team?” We see people as the ultimate success lever in investment management and helping our clients crack that code is what The Imprint Group does.
Stefanova: Carol, what are the biggest people challenges in the asset management industry? How are these interrelated with the bigger trends in the industry?
Some of the biggest challenges we see are the following:
- Succession planning or what we call continuity is a big challenge taking up mindshare. Competitive founders are often reluctant to talk about “succession planning” as they would rather avoid thinking about their own departure. However, if you speak in terms of business continuity, they understand and respond better to that language. As you stated earlier, there is a significant pool of assets in the alternatives arena that are managed by founders in their 50’s, 60’s and even 70’s. Clearly the need to move from founder-led to partnership-led firms will become more and more acute for many of these managers. Some have set the standard for effective transitions, like D.E. Shaw and Farallon Capital Management where there was a multi-year strategy to engage partners and investors in the long-term transition of the firm’s leadership, in the former case to a team of four and the latter to a single managing partner. There is no “one-size-fits-all” model but the consistent themes are a shift in mindset about what continuity means, significant advance planning, a gradual transition and full transparency. There are also spectacular and very costly failures in succession like Chris Shumway’s attempt to transition the firm’s leadership to Tom Wilcox in 2011. More recently, Bill Gross’s unceremonious departure from PIMCO resulted in over $150B in asset outflows, enough to have put many other firms out of business practically overnight.
- Another challenge is collaboration which has become increasingly important both within and across teams. As firms grow, you need people who can work effectively in teams in order to execute better and faster than they could alone. In an industry where star performers have done well operating relatively independently to date, working in teams may not come as naturally. The dependence on people working effectively together is far greater now and calls for more effective collaboration across the firm which requires a whole new set of skills and tools. One major shift in the industry that makes collaboration even more important is that clients are looking for solutions rather than an array of individual products. Designing solutions requires disparate teams to work together. Collaboration needs to happen across the traditionally silo’ed investment side and business development side of the house so that client needs can be conveyed more effectively to the solution builders and also among investment teams. This way, each team can combine their best thinking to develop multi-asset solutions that address specific client needs. The darker side of a lack of collaboration is relationship conflict, particularly between key players, which is where we spend a lot of time with clients as well. Firms often underestimate the toll fractious relationships can take on their overall business success because the impact is harder to measure quantitatively. Identifying and improving these relationships can provide a real opportunity to propel the firm forward.
- In this environment, culture becomes more important than ever. As we know, culture is a key driver of retention and the foundation of any culture is the values of the leadership team. Do leaders really understand the unique set of values they want to stand behind and how to keep these values alive day to day? We see a lot of talk about culture but often the lack of a deep understanding of what it is and how to monitor or change culture leads to inaction and frustration. Developing a strong culture starts with the leadership’s appreciation for how much attention it requires. Extrinsic rewards like compensation can only go so far in driving retention and there is often far more mindshare devoted to how to pay people rather than on addressing intrinsic motivations like engagement, affiliation and values alignment. We would love to see the industry spend even half as much time on these issues as they spend on deciding how much to pay people!
- As firms continue to grow in size and complexity, the need for professional leadership and management within all segments of the firm increases. We think it is now vital for firms to focus on building leadership capability, particularly for those individuals currently or soon to be in the most critical senior roles. You can only add so many great individual producers to a firm. At a certain point, you need player/coaches and then pure coaches. At The Imprint Group, we often talk about the growth of “distributed leadership” – that means having more leaders in more places across the whole firm – because the traditional top-down model will continue to become less practical. Spans of control and levels of complexity are often now too unwieldy for a single leader or a small, concentrated leadership team. Like the development of other specialized functions within asset management firms, like a dedicated client service function in the 90’s or a dedicated compliance effort more recently, we see the professionalization and expansion of leadership and management roles to be an ongoing and important evolution in the industry. One outcome of this will be the role of Chief Talent Officer, which will become more common and more central to success. A number of leading firms are recognizing the need for a strategic-minded business person to focus full time on maximizing talent, not just the traditional administrative HR function. People like Matt Breitfelder at BlackRock, Joan Lavin at KKR and Lisa Baird at Taconic are great examples of the high caliber person that the most forward-thinking firms are deploying.
These are all challenges that we help firms address through our programs and through our focus on people as the catalyst, particularly the cadre of top people who are the most critical to the firm’s success.
Stefanova: Talent and leadership are clearly critical to the asset management industry and these are concepts that are well developed in more mature industries. How does the asset management industry compare to other industries, both in terms of the importance of these concepts as well as their maturity?
Morley: The asset management industry is interesting. In spite of talent being so central to success, there is often limited understanding of how to tap people’s full potential and create a culture that promotes full engagement and top performance. There is tremendous value to be gained by bringing talent management practices in the investment management industry out of the dark ages.
We see opportunities to do more at all stages of the talent lifecycle – recruiting, assessing and onboarding new hires; developing existing and future leaders; and promoting collaboration within and across teams. Talent development has been a long-standing and proven strategy to create value in other industries – think about industrials, professional services, consumer products – GE, IBM, Price Waterhouse, P&G, Pepsi, to name a few – but it is still a novel concept within the investment arena. Asset management is still a relatively young industry in many respects and quite immature in some of its business practices. If you think about it, the institutional business only came about on the heels of ERISA passing in 1972 so the industry is not even fifty years old yet. And the alternative asset sector is even younger. Compared to many industries, it’s still in adolescence. In particular, alternatives tend to attract young people and adopt a “grow-your-own” mentality. This insular approach to talent has resulted in limited cross-fertilization of best practices from other industries, including talent development.
This is also an industry where the skills that are most highly rewarded fall into two categories: the ability to generate investment performance or the ability to gather assets. The people who perform best in those two realms tend to rise to the top and often do not have the natural leadership or management skills required to succeed as their role grows. Whereas in other industries, leadership development and management training would be considered the norm – indeed, mission critical – it is still largely a foreign concept in the investment management industry. Most leaders are left to sink or swim, which often results in at best suboptimal business performance or failure to grow, and at worst unwanted turnover and toxic cultures.
Stefanova: Developing leadership capabilities has not generally been a key focal point for hedge funds. As you said, the highest valued individuals have generally been those that can either generate alpha or raise capital. Even though this is still the case, I am beginning to see a different trend from speaking with leading firms. The most forward-thinking firms now are focusing on creating continuity and understand that they are operating in an increasingly complex environment. Thus developing leadership and management talent has become a forefront strategic objective. What are the role models or intellectual ideas around leadership and talent that your team admires and is introducing to hedge funds?
Morley: There are many! We take pride in being a continual “leadership lab.” There is so much terrific content on leadership that is not generally accessed by the investment industry. Leadership is not viewed as a scientific endeavor and is often termed the “soft stuff.” While leadership is certainly in part an art, there is an awful lot of science to draw from as well and we’ve studied the research of a significant number of experts across a range of domains and synthesized their best thinking across our programs.
We include elements of cognitive psychology from Martin Seligman and Daniel Kahneman, community-building from people like Seth Godin and Keith Ferrazzi, innovation from Clay Christensen and Alan Iny, and relationship-building from The Ackerman Institute. And many others – Carol Dweck, Brene Brown, Amy Cuddy, Simon Sinek, David Allen to name just a few – the list is long!
What makes our work unique is that our programs draw from a wide range of disciplines including leadership theory, behavioral science, cognitive psychology, organizational dynamics, relational theory, creativity and innovation and business strategy.
Stefanova: I shared earlier that one of the talent challenges the industry faces is lack of diversity. Based on your experience Carol, why is the asset management industry one of the least diverse in terms of attracting talent?
Morley: This is a complex issue, and we think it starts with hiring practices. In other industries, hiring practices are often more rigorous and also more deliberately engineered to promote diversity. In the investment arena, hiring practices are particularly old-fashioned and often go something like: “You’re smart, we know people in common, and we went to the same schools.” Whether consciously or subconsciously, there is clearly a lot of mirroring that goes on. The alternative asset arena primarily started with white men and it hasn’t changed much.
Is the industry going out of its way to increase the representation of women and people of color? In a few cases, they are taking it seriously. In some cases, they are paying lip service to it. But in many cases, it is not viewed as a critical action item. This is an industry that hasn’t yet begun to fully appreciate that diversity of thought can greatly contribute to a firm’s bottom line.
Also, as clients diversify and globalize, they will expect their managers to look more diverse and global as well. So while we agree that diversity has historically been undervalued (to be polite), we see some firms actively getting ahead of this curve knowing that clients will demand it, and also seeing the increasing diversity of future talent pools. In our view, diversity goes far beyond gender and race and our programs help draw out and illuminate where diversity exists and can be augmented.
Stefanova: Do you think the asset management industry must change how it attracts, develops, and manages talent? And what are the implications if it does not do so?
Morley: Absolutely. Based on everything we’ve witnessed over the past twenty years, we are confident the industry now needs to take a hard look in the mirror and shift its attentions inward; that is, towards managing its internal talent, instead of only looking at new products or new channels as the source of incremental growth. A business strategy is only meaningful if it is actually executed effectively – the industry is beginning to appreciate that people really matter and that painting a clear and inspiring vision and fully engaging key producers to execute on that vision is key to success. While perhaps not a visible “burning platform” issue, there is an iceberg looming under the water and we foresee more frequent and more dramatic failures in the future if people issues don’t take a front seat. In our view, the firms that shift their attention to leveraging talent will certainly have an advantage over those that don’t.