Hedge funds are bringing in headhunters as they become increasingly sophisticated in their recruitment needs.
Executive search firms such as Lutyens Da Cunha, Durham Capital and Schwab Enterprises do much of their business with hedge funds. Contingency recruiters, which operate without demanding an upfront fee, act similarly: 7 Fifty Two Solutions and HedgeHunt are specialists and Huxley Finance, a large banking recruiter, has numerous hedge fund clients.
Dean Looney, lead consultant at Huxley in London, said: "When hedge funds start, they use their own network of contacts to hire. But once they're up and running, certain niche skills are difficult to find, no matter how wide their network reaches."
US hedge funds have a longer history of working with recruiters. Glocap, a New York City search firm, has placed 650 people with 250 hedge funds since 2002. Adam Zoia, head of hedge fund practice, said recruitment has not been deterred by difficult markets and a slowdown in funds' inflow: "We've never been this busy. Hiring hasn't diminished at all."
In the past few weeks, the flow of talent from banks to hedge funds has continued, with the likes of Rod Barker, head of prime brokerage at Credit Suisse First Boston, leaving for UK-listed RAB Capital. A recent survey by Glocap revealed bonuses for hedge fund professionals with between five and nine years' experience rose 35% to $287,000 (€241,000) between 2004 and 2005.
The threat to banks is from hedge funds' lavish pay packages and the speed of their decision making. Recruiters say banks have formalised recruitment and increased the role of their human resources staff, adding a layer of bureaucracy and delaying decisions. By comparison, few hedge funds have HR departments, leaving them free to make decisions almost instantaneously.
Looney said investment banks faced more streamlined competition as a result: "I've been in plenty of situations in which a bank and a hedge fund are interested in the same candidate but the hedge fund wins. It's commonplace: a hedge fund will make an offer on the same day for a good candidate, a bank might take two weeks or more."
Some banks have recognised this and were speeding up hiring, said Baker.
The head of recruitment at a large US bank said it was able to turn round offers in a working day. "Sometimes we interview someone in Europe and have to refer to senior management in the US before we can make the hire, which can take a couple of days - but we can be nimble when necessary."
The bank has lost only one recruit to a hedge fund this year, he said.
This may be just as well because hedge funds, and recruiters acting on their behalf, are seeking an increasingly broad array of bank employees.
One London-based hedge fund search specialist said funds are using recruiters to source operational staff: "As a general rule they will hire for money management roles from their own networks. It's the other roles they use us for - sales and marketing, product specialists, chief risk officers or compliance."
David Durham, managing director of Durham Consultants, said hiring was focused on chief operating officers. "Hedge funds need someone to take over the day-to-day running of the company. Money managers who've moved from the sellside don't even know how to fix their own computers," he said.
The quest for back and middle-office staff is making itself felt in terms of pay and attracting unconventional bank employees to hedge funds. Glocap's salary survey found pay for hedge fund chief operating officers was as high as $800,000.
Last month, Joanne Pace left CSFB where she was global head of human resources, to join FrontPoint Partners, a US hedge fund with $5bn under management, as its chief operating officer.
Looney said hedge funds were also prepared to offer generous enticements to investment banks' IT developers. "It's not uncommon for us to move banking developers to hedge funds for salaries that are 25% higher, on top of which they can earn bonuses that are closely aligned with the organisation's profit."
Not all hedge funds are ready to pay recruiters' fees. Dermot Coleman, a partner at Sisu Capital, a London-based fund, said recruiters are overpriced.
"We don't use them. On the equities side, we get good quality CVs sent to us. We tend to hire senior people by word of mouth and we'll advertise ourselves for mid-ranking staff, if necessary," he said.
John Capaldi, managing director at Financial Risk Management, an international fund of hedge funds, said it reduced recruitment costs by training juniors in-house. He said: "It's resource-intensive but worth it. We generally hire from the market but it's more expensive that way."