Upcoming changes in UK employment law will draw more scrutiny on hiring processes and employees’ performance across the country’s hedge fund industry, according to experts.
From 1 January 2027, all employees will be protected from being unfairly dismissed once they have completed six months of employment, instead of two years under current laws. The compensatory award for ordinary unfair dismissal, which is currently capped at the lower of one year’s base salary or a statutory limit if £123,543, will also be abolished.
The changes will particularly impact the cash-rich hedge fund industry, known for paying tens of millions of dollars to portfolio managers amid a growing talent war.
“This is the biggest change in employment law in decades,” said Elizabeth Wake, of counsel at Simmons & Simmons. “We do anticipate a greater level of scrutiny, not only over hiring decisions, (maybe managers will take fewer risks on speculative hires), but also over employee performance against expectations in the first six months of employment,” Wake added.
“Firms may look to enhance their due-diligence processes to better their chances of getting the right people through the door to begin with,” said Vicky Wickremeratne, a partner in Simmons’ employment, pensions and incentives practice in London.
The UK remains a key destination for hedge funds. The country is home to 57 out of the top 500 global hedge funds by assets under management, according to a June report by date and intelligence platform Alternative Fund Insight.
Hedge funds employ tens of thousands of staff in the UK, research from the Alternative Investment Management Association found, making it one of the top destinations for investment professionals.
Colin McGhee, founder and managing director at hedge fund recruitment fund Paragon Alpha, said that hedge funds will become more careful up front amid the changes in employment laws.
“You could see more referencing, more due diligence around the actual track record, risk taking, team dynamics and probably more focus on contracts and expectations before someone joins,” McGhee said.
Experts also believe that the changes in UK employment law will put more focus on the performance of portfolio managers.
“Firms will want to be very clear from day one around performance expectations, risk parameters, behaviours and general fit within the platform,” McGhee said.
“I would expect firms to look closely at how the portfolio manager is settling in – are they deploying capital in the way that was discussed, operating within agreed risk parameters, building the right team and is the investment process translating properly onto the new platform? That doesn’t necessarily mean they need to be making money immediately,” he added.
Wickremeratne said that exits will become more expensive: “The big impact is going to be when things go wrong, and you need to exit people; even the most straightforward employee exits (for those with over six months’ service) are set to become significantly more expensive.”
Elsewhere – the UK is at risk of its booming financial services industry being governed overseas after lagging behind rivals in digital asset innovation, a new report has warned.
Banking industry body UK Finance has issued a rallying call to policymakers to move at pace in developing the infrastructure to power tokenisation or see the country lose its competitive edge as a leading financial centre.
In a joint report with management consultancy Oliver Wyman, the group warns the “challenge is now the execution – the ecosystem will form regardless”.
“If the ecosystem anchors in New York, Frankfurt or Singapore, the UK’s £290bn industry will operate on infrastructure designed, governed and priced elsewhere”.
Tokenisation converts traditional financial assets, such as government bonds and cash, into digital ‘tokens’ that can be traded and tracked in real-time. While regular digital money represents cash moving electronically through standard bank accounts, tokenisation packages the financial asset itself into smart code.