The Fastest Way to Wreck Your Hedge Fund Career
If bad performance leads to a fund liquidation, high-level employees can suffer “permanent” setbacks — including lower salaries — in the years to come, new research shows.
Those pursuing careers as hedge fund managers can rise fast — but risk a hard fall.
New entrants to the hedge fund industry typically climb up the ladder quickly, with most promotions occurring early on in their careers, according to a new working paper from the Center for Studies in Economics and Finance at the University of Naples in Italy. But those who achieve senior-level positions face “permanent” career setbacks if their fund liquidates after persistently underperforming, find researchers Andrew Ellul, Marco Pagano, and Annalisa Scognamiglio.
“While entry in the hedge fund industry tends to propel professionals quickly to high-level positions, it also exposes them to the danger of permanent setbacks in case of liquidation of the funds they work for,” they wrote.
For the study, Ellul, Pagano, and Scognamiglio collected and analyzed data regarding the careers of 1,948 individuals who at some point worked at a hedge fund in low-, middle-, or high-level positions between 2007 and 2014, according to Thomson Reuters’ Lipper-TASS database.
They found that new hedge fund hires experienced a “significant acceleration” of their career, with the average employee increasing their salary by $750,000, when they first start at a hedge fund firm. Career progress was faster for men, graduates of “top” schools, and those with previous job experience in asset management, as well as employees at hedge funds that had outperformed over the previous three years.
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However, if persistent underperformance resulted in a fund liquidation, high-ranking employees at that hedge fund experienced setbacks such as declines in job levels and salary, frequently accompanied by a change in employer. On average, top executives suffered demotions resulting in annual compensation losses of $664,000 after a fund liquidation following two years of poor performance.
This article has been updated to reflect a newer version of the working paper released on March 31, 2018.