Hedge funds and private equity face talent shake up

LONDON (Reuters) - More and more top hedge fund and private equity managers are set to move to new firms as the credit crisis bites, speakers at this week's Reuters Hedge Fund & Private Equity Summit in London said.

Life has become tougher for both hedge funds and private equity in recent months, as debt, which has fuelled both industries in recent years, has become harder to obtain and market volatility has hit returns.

This is squeezing talented fund managers in many firms, either because their firms are finding it harder to reward them adequately in these tougher conditions or because their funds have suffered as market conditions have worsened.

"I think we're seeing more movement between firms at the moment than one might normally see," said Bill Maldonado, head of alternative investments at HSBC Halbis Capital Management.

"I've noticed in the last month or two an uptick in the number of meetings I can get (with fund managers he may hire) ...Often ... those teams come from firms where maybe things haven't gone so well. They're very talented people, they've historically done very well, but times aren't so great for them at the moment."

After returns of 12.56 percent in 2007 and 13.86 percent in 2006 according to Credit Suisse/Tremont, the $2.5 trillion (1.3 trillion pound) hedge fund industry has been hit by volatile markets, investor redemptions and prime brokers paring back leverage.

According to preliminary data from the BarclayHedge Fund Index, the average hedge fund lost 4.4 percent in the first quarter, while other firms measuring hedge fund performance also show falls.

While the bull market and accompanying large bonuses of recent years have prompted a merry-go-round between fund firms, so the tougher environment also provokes moves.

"If a firm is having a difficult period of time and is underwater relative to its high water mark and there is a perception within that organisation that it may be a struggle to get back to that high water mark within any reasonable period of time, then it can become easier to lift out talent," said Maldonado.

A high water mark is a point beyond which portfolio returns must pass before performance fees are earned.

After its own debt-fuelled boom in recent years, the private equity industry is also facing tougher times as banks become less willing to lend.

"You'll find tensions within private equity firms as the returns begin to dry up," said Buchan Scott, head of investor relations at Duke Street Capital.

He says that in the private equity industry, pressure on returns means top fund managers are more likely to leave larger firms and start up on their own -- a different trend from the hedge fund industry where assets are flowing to the bigger firms and small start-ups face greater pressure from picky investors.

"If you're in a fund in year four and you're looking at your portfolio, it's probably not going to bust ... but you can well see that you actually might never make it to carry (a fund manager's share of profits).

"What do you do? Do you sit with it for the next five years without making any money, or do you say: 'Well let's start again, I'm going to walk out'? ... Private equity people tend to be individualistic."