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 “significant and 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 1,627 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 $50,000, 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 “non-negligible” setbacks such as declines in job levels and salary, frequently accompanied by a change in employer. On average, an individual earned $10,000 less by the second year after their fund was liquidated, and their salary remained lower for the following three years.
“Managers in charge of funds liquidated upon under-performing are penalized in their subsequent career,” the authors concluded.