Nishant Kumar, Liza Tetley | (TNS) Bloomberg News
More than a decade ago, hedge fund titan Steve Cohen and his portfolio manager Harry Schwefel sat huddled on SAC Capital’s busy trading floor. Schwefel was musing on how a run of lucky breaks had powered his rise at the firm. Cohen’s reaction: “We shouldn’t allow it to be luck anymore.”
Today he’s enjoying the fruits of that epiphany. The duo went ahead and constructed one of the hedge fund industry’s first assembly lines of top talent — in Cohen’s words by taking people you’d rank as a “nine” and making them perfect 10s. The result is a conveyor belt of polished high-performers who’ve helped him rebuild after a costly insider-trading scandal and to emerge on the other side with an empire whose coffers now boast $34 billion of client cash.
Cohen and Schwefel, who’s risen even further to become co-chief investment officer at SAC’s successor firm Point72 Asset Management, have pioneered the hedge fund boot camp, but they’re not alone. Ken Griffin’s Citadel, Chicago’s Balyasny Asset Management and other industry giants have devised grueling training regimes, too. The trick is to perform a kind of human-resources alchemy: turning the base metal of promising analysts into the gold of portfolio managers who might bring you $50 million to $100 million in yearly profit.
Their talent mills seem to be producing. More than half of Cohen’s stock pickers have come through its program. The first graduate still trades for him. At Citadel, where even an internship can pay $19,200 a month, training up traders means staff are staying longer and getting ahead quicker. Phil Lee was elevated from humble analyst to head of one of its stocks units in less than a decade. Balyasny’s Anthem scheme has churned out 14 portfolio managers who are among its best performers, including partner Sebastiaan De Boe.
At Citadel, trainees are taught how to back pitches from colleagues lower down the food chain; at Balyasny they get a limited pot of cash and have to deliver returns that match or beat the firm’s older hands; Point72 wants its cadre to think like CEOs, meaning they’ll need to create and run a book of ideas, all while getting total buy in from their teams. Their every move is tracked and analyzed, and the data pored over to make sure they have the right stuff.
In the end it boils down to one question: Can we trust you with our billions?
The birth of these programs captures a historic change in this $4.3 trillion industry — as it moves on from the era of wildly competitive one-offs like Griffin and Cohen and tries to incubate a new generation of leaders with softer skills such as team building and listening to other people’s bright ideas. More critically, they’re also being driven by a recruitment crisis. The behemoths of the hedge fund world simply don’t have enough star traders to share around.
“The need’s evidently clear,” says Pablo Salame, Citadel’s co-CIO, in a rare interview. “One of the most significant binding constraints in the industry is the availability of talent.”
Over the past few years the biggest firms have been locked in a bitter talent war that has sparked conflict, litigation and retaliation; and contributed to at least one outfit going bankrupt. With funds unable to hire fast enough to keep pace with their soaring assets, the industry’s future growth is threatened. Already some keep 60 cents of every dollar they make to help pay traders.
As a result, luring outsiders with ever more lavish rewards looks unsustainable. The hunt for unpolished gems in-house is becoming a necessity, not a choice.
Staff shortages put serious limits on the large “multi-strategy” firms, those who hand capital to dozens of traders. Citadel, Millennium Management, Point72 and Balyasny have all slammed doors on new cash despite rampant demand for their funds. Citadel has gone further, giving back $25 billion to clients since 2017, equal to half the industry’s total net inflows over the past 13 years. Millennium has returned about $38 billion since 2020, although much of it came back to the firm in a new share class.
“It’s not our desire to return capital,” Salame says. “It’s that we need to have the people to deploy the capital in a way that’s consistent with our standards and our goals for our investors.”
What Makes a Hedge Fund Superstar?
Not everyone is signed up to this version of the hedge fund “School of Rock.” Izzy Englander’s Millennium is a notable holdout, preferring its star managers to be lone-wolf mavericks rather than the well-honed products of an internal factory line. It does train junior analysts through placements at UBS Group AG.
Englander’s son Michael, however, is betting big on the changing landscape, launching his own multi-strategy fund Greenland Capital to focus on “continuous talent development as opposed to traditional talent acquisition.”
As well as showing an industry in a profound state of flux, these programs also offer a rare glimpse of something that fascinates outsiders and young financiers alike: What exactly makes an elite hedge funder, or a 10 in Cohen’s book? What wins you that seat at the training table?
Talent gets you in the building, but Point72’s Schwefel insists on genuine passion for investing. Citadel’s Lee says it could be a trader’s ability to assemble and lead a team, not always an obvious trait in a world ruled by alphas. At billionaire Dmitry Balyasny’s hedge fund, pure grit is prized highly.
Will Scott, who heads Balyasny’s analyst-training program, cites Stephen McGee as an example. McGee played professional baseball for five years, mostly for the Los Angeles Angels and the San Diego Padres, before switching to finance. He spent a few years at Noble Capital Markets and JPMorgan Chase & Co. before being picked by Balyasny and thrown in with much younger peers last year.
He’s now a top analyst on one of its trading teams. McGee had to “catch up with younger people who’d done internships and been groomed for finance,” says Scott. “The job itself, once you’re at the desk, is very hard and very stressful. People who’ve shown resilience really tend to stand out.”
Going from McGee the analyst to McGee the portfolio manager would be an even tougher leap. The job shifts from recommending which securities to buy or sell to one where you’re risking real money and owning failure. From team building to thorny decisions such as how much to bet, when to cut losses or how long to keep a winner running, there are plenty of ways to make or break a career.
Point72’s Mike Mongiardini took a similar path and has gone that extra step. Another ex-baseball pro, he spent five years in U.S. special forces before heading to Columbia Business School and then Point72. In a recent company podcast, Mongiardini talks about military attributes that equipped him for high-stakes finance such as surviving without the full picture, taking risks that you learn from and building expertise through repeatable behavior.
Ultimately the switch to being a portfolio manager came down to betting on himself and his own investment game plan, he says. “You have to be comfortable with understanding that you’re not gonna have all the information, the stocks aren’t always gonna go the way you want them to go.”
Just don’t fail too much. Multi-strategy hedge funds are designed to make money in all kinds of market weather, inflating returns by using vast sums of borrowed money and backing different types of bets by managers that can cut both ways. People there can have perfectly good careers as analysts, but firms are brutal with traders. They fire them regularly for even small losses.
“There are a lot of broken toys out there,” Schwefel says. “When you try to make that jump and you’re not successful, it’s hard to go back.”
A trader losing 5% at some places including Millennium may see capital partially withdrawn, according to people familiar with the matter. A 7% decline could bring instant termination. Eisler Capital has stopped out traders for losing less than 5%. If Warren Buffett worked for one of these firms, he could have got himself fired eight times over the past decade for breaching risk limits, judged by Berkshire Hathaway Inc.’s share performance.
Such ruthlessness has made multi-strategy firms steady engines of profit. Finding people who can persistently deliver to these standards is another matter, especially when more than 50 such funds are scrambling for them. One recruiter cites a trader he knows of getting fired within a month. Another points to an entire team canned before all the members had joined.
Boom-Time Blues
The hedge fund talent war has several root causes. Supply is constrained because the traditional training ground for portfolio managers — the proprietary trading desks at investment banks — has been laid to waste by post-Lehman regulations. At the same time quantitative easing has flooded funds with money. The industry manages about $3 trillion more than in 2008.
Multi-strategy funds have gobbled up cash at an even more frenzied pace. Citadel’s capital has risen more than five times to $63 billion since 2008, while Millennium has expanded at the same clip to $68 billion. How much more money the giants can handle depends on how fast they can hire or train. Add to the mix the trigger-happy culture of hiring and firing traders, and the hunt for clever managers is as important as stellar returns and raising cash.
Creating “legacy” and firms that outlast founders is starting to figure, too. Some funds are now more than three decades old and are eager to differentiate via culture, such as Point72’s collaboration versus Millennium’s allergy to groupthink. A few let traders work at home, while Citadel’s Griffin wants collaboration “within our four walls.” A Goldman Sachs survey of 20 multi-strategy funds found all put culture and environment as key to luring talent.
Cohen’s Point72, whose training scheme allowed it to rebuild after SAC paid a record $1.8 billion fine to settle a long-running insider-trading probe, taps bright sparks anywhere from university to senior analyst level. The program is helping the firm discover what skills are absent in-house so it can concentrate its fire on outside recruitment targets who bring what’s missing.
Trainees at its Academy program have weekly lunches with portfolio managers and senior analysts to hear of personal stories, successes and failures. Schwefel says it’s hitting an inflection point which could eventually let traders launch faster, with more capital, or start with larger teams and mandates.
Citadel had more than 136,000 applications from graduates and post-graduates this year to join or intern at the firm. It’s acceptance rate is less than half a percent, well below Harvard or MIT. So getting from there to a spot as one of its 150 or so portfolio managers is an epic slog. To do it you need to “successfully put capital behind ideas that aren’t your own,” says Lee. Balyasny trainees have to spend at least 12 months proving themselves by managing capital within a tighter risk framework than veteran traders.
The lauding of teamwork is a departure for an industry built by individuals, who mostly named firms after themselves, called all the shots and made personal fortunes. That’s starting to look dated as investors go for funds that don’t depend on single rock stars but instead hire entire bands of high-performers and chain them to fixed rules, and strict risk limits to avoid disasters.
Lee recalls presenting to Griffin within a year of taking over Surveyor, one of Citadel’s stocks units. On the first page, he described his ambition: I’m going to create the best equities platform on Wall Street. Griffin, sitting across the table, interrupted: Not platform, team. “It seems like a really small difference, but it’s actually pretty powerful in my mind,” Lee says.
While a trader’s true worth becomes clearer through the process, cutting the risk of expensive hiring mistakes, the effort may buy loyalty too. Analysts could be kept on board by seeing a pathway to becoming portfolio manager.
Lee, who worked before at Cadian Capital, joined Citadel in 2013 partly because that route wasn’t easily available to analysts at single-manager funds. “The proudest moment of my career was when I was promoted to portfolio manager,” he adds. “It rivaled how I felt when I took over Surveyor in 2021 because of how hard I had to work to get there.”
He’s since trained four analysts to become Citadel portfolio managers. Three still trade there. Retention at his unit has reached all-time highs in the last two years, Lee says. Half of Citadel’s fundamental-equities portfolio managers and two-thirds of those at Surveyor began as a Citadel analyst or associate.
Seven of every 10 portfolio managers who went through Point72’s training since 2019 are still there. The average tenure of its equities managers is more than six years, the firm says. While there’s no comparable peer data, industry experts say that’s one of the longest stretches at a hedge fund.
“You attract the highest-quality people by offering a career, not just a job,” Citadel’s Salame concludes.
Schwefel is similarly upbeat about what’s happened since his chat with Cohen all those years ago. “The luck has gone down a great deal at Point72,” he says, referring to how it nurtures talent these days. Cohen’s unofficial name of the “Nine” program has also given way to something drier and more corporate. It’s now known as LaunchPoint.
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