"Hedge funds hired too many morons" and other unpopular opinions as the industry pukes PMs

Spare a thought for the hedge funds. As we reported last week, both macro and credit funds have been flooding the street with newly unwanted talent. Goldman Sachs' prime brokerage desk said last week that funds have also experienced one of their broadest equities declines since the COVID pandemic. All is pain.

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Portfolio managers are suffering. A chart has been circulating on X  suggesting 100 PMs are out so far this month, versus 40 in September and closer to 20 before that. Hedge fund headhunters say the number of people out of the market is enormous.

The reasons for the PM exits vary by strategy, but most were stopped out after making losses that exceed their risk limits. In credit, there are issues with weak covenants, regulatory intervention and rising rates. In macro, leveraged trades on French government bonds blew up. In equities, tech stocks sold off. Even multistrategy funds, supposedly insulated against issues from individual strategies were down 1.9% on Thursday according to Goldman data. 

Not everyone is sympathetic. As hedge funds have increased their assets under management, headcount at leading funds has increased substantially with many new hires drawn from banks. ADV forms indicate that 2,000 people were added last year alone. Some in the industry say funds have been scraping the barrel. 

"Hedge funds hired too many morons," says one US portfolio manager. "A lot of people in funds are now very unimpressive," he adds. "There are a lot of clowns who were just long bonds and who have been killed."

Instead of PMs in funds originating trade ideas, he says the model has reversed. "The sellside pitches the ideas and people start to get in on a trade. Then other banks keep repeating the same ideas, and so buyside people keep getting in the same trade until it’s too crowded." 

It ends in a situation where the majority of the buyside is on a similar trade until something happens to reverse it, he says. "And then they can’t get out fast enough because they don’t have enough understanding of the fundamentals and factors that causing problems to that trade."

As funds have scrambled to increase headcount, he says they've hired too many juniors from banks. But banks themselves already lost their best senior traders to hedge funds years ago and the juniors being hired have lacked guidance from talented traders. "There are no mentors left on the sellside to coach juniors," says another portfolio manager. 

Coupled with the fact that the job of a portfolio manager is very different to the job of a trader on a desk in a bank, this has contributed to the blow-ups, say observers. "It is a very different world being a market making junior on a desk to trying to trade against the spread. You are not just doing trades and hedging against a book but are exposed to market moves and the dislocations that have happened this year," says one industry insider. 

All of this implies that portfolio managers leaving now will find it hard to get new roles. Many are on non-competes anyway. Some have only recently been hired and are on guarantees.

Some in the market strongly disagree with the framing above, though. One young PM tells us the losses and stopping-outs have nothing to do with PM ability and everything to do with the growing size of funds. Freddie Parks, head of Goldman Sachs' prime broking team, said in September that $500bn had flowed into multistrategy funds in the previous 12 months. 

"The real cause is that hedge fund AUM have exploded, so everything is more crowded and markets can’t absorb that much liquidity," says the young PM. It's not the fault of the young traders hired from banks. If anything, he says they are very risk averse because they weren't taught about real risk-taking in banks. Some funds charge PMs for the capital allocated to them, creating pressure to put capital to work even in difficult markets.  

At some point, funds will need to hire new people. There are rumours of non-competes being shortened to facilitate this. Some of those now out of the market will have to come back in a different guise, says Richard Averill at Waterline Compensation, which models hedge fund pay. "Most teams have a strategy that differentiates them from other PMs, but if your strategy no longer works, you don’t just have bad positions, you have a strategy that no longer makes sense."  

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