The Federal Trade Commission’s ban on non-competes will be a “game changer” for hedge funds, recruiters say, as the sector prepares for greater competition.
The move will allow portfolio managers and quantitative researchers to switch firms more easily, but is a blow to large hedge funds paying law firms big bucks to enforce strict non-compete clauses, according to headhunters.
“The announcement changes everything. It’s very good for star portfolio managers who want to do their own thing, with more freedom and confidence now,” Vax Bahram, a London-based recruiter and hedge fund industry veteran, told Financial News. “This is bad news for larger hedge funds with an army of lawyers.”
The FTC voted 3-2 in favour of a ban on non-competes on 23 April, a move that the regulator believes will help create new businesses, boost innovation and raise wages.
“The FTC’s final rule to ban non-competes will ensure Americans have the freedom to pursue a new job, start a new business, or bring a new idea to market,” FTC chair Lina Khan said.
Pursuing a new job or starting a fresh business can be tough in a hedge fund sector known for putting strict non-compete clauses in contracts.
While senior portfolio managers can get paid as much as $120m, they often have to agree not to join a rival or set up a new shop for a number of years after they leave their firm.
Ken Griffin’s Citadel Securities filed a lawsuit against former employees Leonard Lancia and Alex Casimo for allegedly stealing trade secrets and breaching non-compete clauses after the duo established crypto firm Portofino Technologies, Bloomberg reported last year.
Citadel was also involved in a dispute with competitor Balyasny over hedge fund talent last year. Ken Griffin’s hedge fund alleged that several of the firm’s employees who left to join Balyasny had misappropriated its confidential information, Bloomberg reported.
“The FTC’s announcement will not only increase the flow of talent and growth of newer funds, it could also force firms to be more competitive with retention strategies instead of the threat of sitting out for 18 months,” said Max Heppleston, managing director at hedge fund recruitment and consultancy firm Fredriks.
“This could be massive for newer funds as top portfolio managers, analysts, and teams will be able to move more smoothly, and startup hedge funds can get going quicker, which can be so important to their success,” he added.
For Austen Smart, a Dubai-based hedge fund headhunter and managing director of Tighe International, the FTC’s announcement has given the candidate “more power”.
“Now candidates can move whenever they want, not when the fund they leave tells them to,” Smart said.
However, not everyone believes that the FTC’s announcement will have a significant impact on the industry.
“Overall, culture and compensation structure is likely more important than a non-compete. Funds take a while to set up and a star portfolio manager is not going to set up or not because of a non-compete,” said Patrick Ghali, co-founder of Sussex Partners.