3. 1
Much like people, companies and industries have life cycles. To stretch
the analogy, many hedge funds—like those who have founded and
run them—have reached or are approaching a new phase in their life
cycle, representing the time to consider new leadership. Hedge funds
are a relatively new industry, originating during the mid-1960s when
the oldest of the baby boomer founders were first active. A new model
of leadership is now emerging, something to keep in mind during
discussions of succession. While the lone entrepreneur/founder, who
focuses little on management development and succession, may not die
out completely, larger firms where these and other common practices
are institutionalized will be better positioned to thrive and compete.
The hedge fund industry has matured and evolved over the past 20
years and quite significantly in the last 6 years. Institutional investors
have a deeper understanding of funds’ investment strategies, risk
management, operational infrastructure, issues within the regulatory
environment, fee structures, and how to position hedge fund
investments within their overall portfolios. Investors have demanded and
generally received increased transparency into the underlying positions,
unique and flexible fee arrangements and liquidity terms, and an ability
to customize their allocations.
Despite the growing sophistication of hedge funds and their investors,
the industry is still in its infancy when it comes to adopting succession-
planning practices. The reasons for this slow adoption chiefly have to
do with the nature of individuals who founded and built these firms as
well as the prevailing culture and the nature of the business itself. But
as founders consider diverting their time and leadership away from
their day-to-day responsibilities inside the firm, addressing the issue of
succession becomes unavoidable. Specific approaches may borrow from
best practices that are now entrenched in other businesses, although in
many cases those practices must be carefully tailored to the differences
that make hedge funds unique.
Based on our experience working with hedge funds and the
perspectives of industry insiders we tapped for this piece, we present a
view of the challenges of succession planning for hedge funds as well as
solutions to what is becoming an issue of increasing urgency emerging
from a confluence of three factors: the life stage of founders, increased
regulation, and the accelerating institutionalization of the industry.
Introduction
Hedge funds
are largely a
cottage industry
with fragmented
businesses. They
still don’t know
what they want to be
when they grow up.
“Is the leader today
and going forward a
tenured investment
professional or a
business builder
who can identify and
attract true talent
and leaders?”
–John Rohal, chairman,
Man Investments USA
4. Until recently, hedge funds have been fairly opaque to outsiders,
operating in a largely unregulated environment. Individual firms have
continued to evolve, as has the entire industry. Hedge funds have
grown to approximately $2.7 trillion in assets under management
today, with continued inflows likely from both institutional and retail
investors despite the recent exit of the asset class by CalPERS.
Some recent developments—and repercussions—have had a
significant impact on the future direction and shape the industry is
likely to take. The revelations of Madoff underscored the need for
greater scrutiny of both operational infrastructure and funds overall.
Moreover, the global financial crisis of 2008 was a wake-up call to
many institutional investors on how they position their aggregate
portfolios. According to a recent survey by KPMG and AIMA,
institutional investors now represent 57% of the industry’s assets under
management, with larger institutional investors gravitating toward
larger hedge fund firms. In addition, since the global financial crisis,
hedge funds have had to comply with increased regulation and deeper
levels of due diligence, with consultants and allocators demanding
increased liquidity and often lower fees.
Perhaps not surprisingly, as the largest funds get larger with more
product diversification, they are starting to look and operate less like
the insular hedge funds of the past and more like the alternative asset
managers they now are. Along with this exponential growth, greater
institutionalization, and demand for transparency comes a focus on
the future stability of these organizations, which naturally links to
ongoing scrutiny of leadership and succession.
Asset flows into hedge funds, both institutional and retail, continue
to increase. While many rely on larger and tenured funds (which are
increasingly multi-strategy), others are finding returns in smaller
emerging managers with specific investment expertise. Regardless
of size, however, the vast majority of hedge funds are still run by the
original founders. Increasingly these founders—with the titles of chief
investment officer, chief executive officer, and chairman—would like
to spend more time on philanthropic and other personal pursuits.
Many are currently confronted with the issue of succession, and if they
are not addressing it directly themselves, the institutional investor is
raising it for them.
2HEDGE FUND SUCCESSION: DON’T SELL IT SHORT
Why succession planning?
Why now?
“The degree of
criticalness in
succession planning
correlates to the
duration of the trade
or the liquidity lock-
up provisions. You
want that person
there for the duration
of the trade.”
–James C. McKee, senior vice
president and director, Callan
Hedge Fund Research Group
5. 3
What’s in a name? A great deal when it comes to hedge funds.
When the success of an individual’s track record and that of a firm
are inextricably intertwined, investors may be understandably skittish
about change, especially one that occurs too quickly. Have investors
had enough time, exposure, and information to be convinced that the
investment success of the firm does not merely reside in one person
but is rather institutionalized across a firm and can be replicated by
successors? When this has not or cannot be done, founders and their
often-eponymous firms have sometimes closed their doors rather than
attempt to plan for new leadership.
The actual personality behind the name on the door is as important as
the firm’s identification with an individual name. Hedge fund founders
have not necessarily succeeded because of their skill as large
What makes succession
such a challenge?
“Some of those who
run hedge funds
say ‘all we need
is raw talent; just
leave us alone,’ and
some allocators and
investors are okay
with this approach.”
–Jane Buchan, CEO and
managing director of Pacific
Alternative Asset Management
Company (PAAMCO)
Unlike publicly traded or more traditional investment management firms
that have boards of directors and shareholders, most hedge funds have
run their businesses more privately. How do they approach the question
of succession? Thoughtfully. Handled skillfully, organizations can have
multiple lives, reinventing themselves with successive generations and
adapting to shifting business priorities and regulatory environments.
Succession at hedge funds has recently been highlighted by the media
as a significant number of founders’ retirement scenarios have unfolded
in various ways, from planned succession to simply closing shop.
Attention-getting headlines, such as the Financial Times’s “Hedge Funds
Should Invest In Smoother Handovers” and Bloomberg’s “Hedge Funds
Facing Succession Challenges,” have highlighted the issues but have not
necessarily suggested practical solutions.
6. institutional team players. They’re accustomed to being in charge,
and asking them to plan to cede control of the enterprise is anathema.
In other words, the very traits that made these individuals industry
leaders—driving success in a non-institutionalized environment and
operating independently in a world where thinking and planning 5–10
years out is a lifetime—may be at odds with traditional succession
planning.
Conventional succession planning may prove difficult at founder-run
firms for other reasons. When the founder holds most of the equity, no
one has sufficient ownership or the power to steer the firm in another
direction. And while there is often “shadow equity,” no real control or
voting rights are attached to it; for all intents and purposes, these firms
are still run by the founders.
Another barrier to implementing succession practices at hedge funds
is that while general awareness of its importance exists, there are
rarely external boards keeping it top of mind and ensuring the ongoing
“care and feeding” integral to the process, not to mention the “long
runway.” At both public and private companies, succession planning
is primarily a board responsibility discussed regularly throughout the
year; it is directly linked to strategy discussions and often to the CEO’s
incentive compensation. This is in contrast to earlier approaches,
before the adoption of governance practices linked to the interests of
shareholders, when succession planning lay squarely with the CEO and
was often neglected. Generally speaking, unless a hedge fund has gone
public, the existing boards are not the independent force they have
become in public companies. By contrast, governance is much looser at
hedge funds; boards have less real power.
There is also the possibility that hedge funds may not possess the right
leadership bench internally to succeed a founder. A deep understanding
of the investment strategy is the sine qua non of any successors,
whether they act in an investment capacity or not. Homegrown talent is
ideal, but whether the strategy is to develop internal successors or look
outside for capable candidates, allowing sufficient time to determine a
successor and hand over the reins is crucial.
4HEDGE FUND SUCCESSION: DON’T SELL IT SHORT
“Hedge funds are
guys who got ahead
because they didn’t
want to sit in asset
management firms;
they wanted to run
the business their
way. Now they have
to delegate authority
when they’ve been
successful because
they haven’t
delegated authority.”
–Jane Buchan, CEO and
managing director of Pacific
Alternative Asset Management
Company (PAAMCO)
“Advisory boards
may help a firm’s
marketing image,
but they don’t do
much more than that,
except when a firm
goes public the often
newly constituted
public board is
charged with critical
responsibilities.”
–John Rohal, chairman,
Man Investments USA
7. 5
Founders have different views of their firm’s raison d’être, as reflected in
their outlooks on the future of their firm. Many have not planned beyond
their own leadership because they don’t believe they have yet achieved
a meaningful valuation for the firm and are focused on maximizing their
returns. Some plan to step aside quietly, selling or transitioning to a
successor, to focus on personal interests.
A founder’s view of the relative priority of key constituencies—
investor, employee, founder/management team/partners, and, if public,
shareholders/debt-holders—will also determine whether succession is
part of a longer-range plan.
Firms poised for longer-term success view management and investment
talent as their key assets and treat them as such. A systematic approach
to hiring, developing, and maintaining key talent will not only help
firms retain potential successors but also can serve as an important
differentiator in the marketplace, signaling stability, a solid investment
strategy, and long-term staying power. Lack of attention to succession
planning demonstrates to the rest of the organization that leadership
isn’t thinking about their future. That can lead to turnover, although
some employees may be comfortable with this approach if they can
continue to do the work they enjoy and be paid well for it. Ultimately,
however, the strongest performers, if they see no ownership potential
for themselves, will likely leave for other firms or launch their own funds.
Viewing talent as an asset to be valued and developed requires more
than mere lip service. It is readily apparent, both internally and externally,
how seriously a firm takes broadening leadership beyond a single
individual.
Viewing talent as an asset…
really.
“The amount
of autonomy
and leeway that
teams are given
is important in
retaining high-
performing talent.”
–John Rohal, chairman,
Man Investments USA
8. Timing is always a critical aspect of succession, but nowhere is it
more important than at a hedge fund where the founder’s name
is on the door. Particularly when success and performance are
synonymous with an individual, investors and allocators require
exposure to successors to acquire needed confidence in their
ability, before succession actually takes place.
That is a process, not merely an announcement, and requires time—
ideally three to five years—and thoughtful positioning.
Assuming a founder settles on a succession choice, the earlier the
decision is announced and the more exposure investors have to
this individual, the greater their comfort level is likely to be. The
perception of stability—that little will change if the fund is doing
well—is key. Once the succession is made public, that individual, if
not already a known entity, should have the opportunity to closely
interact with investors—the more frequent the contact, the greater
the degree of trust. The actual transition should be gradual: from
joint involvement, with the founder remaining involved as an active
investor/decision maker, to little by little becoming less active in the
day-to-day activities of the fund. Finally, in the course of a subtle
transition, while the founder may maintain an office at the fund
and remain available to talk with investors, the successor is really
running the show.
Those on the outside should be less aware of a transition in
leadership—and when it actually occurs—and more aware that
their investment is still in good hands and that little has changed.
6HEDGE FUND SUCCESSION: DON’T SELL IT SHORT
The art of the handover.
“When the founder
is a key person,
the generator of
investment ideas,
and decides to leave,
investors will need to
be reassured: Will the
fund suffer without
the founder?”
–Frank Meyer, founder,
Glenwood Capital Investments
9. 7
CEO succession planning: Adapting corporate best practices to hedge funds.
Established best practices for other industries have to be thoughtfully adapted to work
at hedge funds, which often have very different governance and operating models.
The 3 “Rs” of hedge fund succession planning.
Succession practices worth
considering and tailoring.
The rule The rub The remedy
1. Plan in advance – CEO succession
is neither short-term nor event
triggered, but an ongoing discussion
with the board to address short-,
mid-, and long-term company needs.
2. Engage the board – The board
should own and drive the CEO
succession-planning process by
having it on the agenda regularly,
scanning inside and out for potential
successors, and ensuring talent
development at all levels.
3. Set up a formal assessment process
Facilitated by the CEO, this ensures
standards for sustained leadership
and provides the board with
additional opportunities to
evaluate priorities and needs.
4. Create a “future CEO” profile –
The board should create CEO
profiles that align with the
company’s business strategy and
represent required short-, mid-
and long-term competencies for
future generations of CEOs.
5. Expand the pipeline – The wider
and deeper the pipeline of
candidates the better. Companies
should develop talent internally
and also have knowledge of top
talent in the external market to
maximize options and minimize risk.
–
Hedge funds operate in
current and shorter-term
(market) environments, which
often are at odds with longer-
term leadership requirements.
The majority of hedge funds
remain private, largely owned
and run by original founders.
While some have boards and/
or advisory committees, they
are not tasked with driving
succession.
While formal assessment
processes have become more
of a priority, CEO assessments
are not the norm. The need
to identify internal succession
candidates is just starting to
take hold.
Hedge funds have
historically focused on
driving performance
versus anticipating
future leadership needs.
Due to their generally lean
composition, hedge funds
do not have the depth
of leadership of major
corporations.
Hedge funds focus on the
strategy and longer-term
leadership needs in addition
to current, shorter-term
investment expertise.
Fund founders/CEOs should
seek objective guidance
from expert advisors in the
succession-planning process.
Founders/CEOs should
recognize that they may
lack objectivity to properly
assess the capabilities of
future leaders and should
rely on a rigorous, proven
assessment process.
Focus on creating bench
strength by developing
insiders who align with
future needs of the firm.
Focus on both near-term
leadership and development
at an earlier stage. Bring in
outsiders, as necessary, long
before a successor is required
so they can be developed and
steeped in the culture.
10. 8HEDGE FUND SUCCESSION: DON’T SELL IT SHORT
The 3 “Rs” of hedge fund succession planning. (cont’d.)
The rule The rub The remedy
6. Expose the board to the bench–
Board members should gain
valuable insight into the leadership
pipeline by interacting with the
company’s highest potential leaders
in a variety of settings.
7. Address succession dynamics
head on – Succession is a sensitive
topic for boards and CEOs, but
there are processes for aligning
roles and responsibilities.
8. Talk succession regularly – At a
minimum boards should have an
annual, formal discussion with the
CEO on succession planning and
a mid-year update to maintain
succession as an ongoing board
priority.
9. Manage the transition – The handoff
between incumbent and successor
and related communications should
be planned well in advance, and
roles of all key parties carefully
delineated.
10. Plan for sudden loss of leadership–
In parallel with the long-term
approach, companies must have an
emergency CEO succession plan in
place at all times. This plan should
be reviewed at least once annually,
and should include multiple options
for leadership.
Lack of a credible board to
advise potential future leaders.
Without a board to keep a fire
lit under CEOs, they may keep
their heads firmly planted in
the present.
If succession is planned for, at
all, it may only be discussed
on an ad hoc or immediate
needs basis. This has recently
become more of a priority for
some firms.
Even if a successor has been
planned for, a poorly planned
transition can rock the boat,
send the wrong message
internally and externally, and
destroy value.
Funds may face significant
redemptions, be in greater
jeopardy, or even be forced
to close, with no emergency
successor lined up.
In the absence of a formal
board, assemble a roster of
experts and advisors to assess
and advise on those being
groomed for leadership.
Take the bull by the horns and
recognize why succession
planning has been avoided
and resolve to address it
regularly and systematically.
Raise the profile and rigor
of the succession planning
process by tying it directly to
regular strategy discussions.
Plan for a gradual transition
so that the successor, the
organization, and external
constituencies can adapt to
and buy into the change in
leadership.
As a first step in succession
planning, designate a
successor to maintain the
confidence of all stakeholders
should the “hit-by-a-bus”
scenario occur. Ideally, this
should be in place for all “key
man” professionals.
11. 9
The first principle of succession planning, regardless of the industry, is that even
a planned succession may quickly take an emergency course; it’s important to
plan for various scenarios. Planned succession is the route assuming all goes as
anticipated, but unforeseen events can intercede and necessitate implementing
an alternative plan. Emergency succession is a contingency plan that can be
kicked into gear to deal with an unexpected event forcing a sudden succession
(e.g., health crisis, scandal, CEO departure to another company). This plan would
include immediately naming an acting CEO, previously identified, who could be
an internal candidate or an interim leader, whether that individual is an internal
executive or a board member (assuming there is a board).
Effective succession planning is always rooted in a firm’s strategy. Large public
companies focusing on best practices should share a common understanding of
the corporate strategy with the board and CEO able to articulate those priorities
and plans in the same way. Even in the case of a founder without the input of
a board, delineating the strategy is the first crucial step in helping define the
specifications for the next CEO, who will help execute that strategy.
Some other commonly accepted best practices are trickier to adapt because
they assume the board is leading the process, which is unlikely to be the case at
most hedge funds. Properly executed, succession is generally now viewed as a
crucial, ongoing board responsibility closely tied to management development.
Succession planning is both a top-down and bottom-up approach to developing
management talent throughout an organization, not geared toward just finding
a new CEO but rather successors for all key positions. Even in the absence of a
board—or where the founder clearly is in charge of succession—it is important to
plan beyond just the CEO to successors for all critical contributors in the firm.
When boards serve as a counterbalance to the founder or chief investment
officer, it is possible, indeed critical, to maintain clarity between the CEO’s
role in succession planning and the role of the board. The CEO’s role is closely
tied to developing and assessing internal candidates and then letting the
designated committee do its job. Many leading companies also now maintain
an ongoing, measurable role for the CEO in the succession process and results,
according to specified agreed-upon metrics, are reflected in the CEO’s incentive
compensation. With the understanding that CEOs want to do a good job when it
comes to succession planning, specific objectives keep everyone on track.
12. The model for the hedge fund that was successful 10 years ago or even
today will likely be far different from the one that will be successful 10
years from now.
Increased regulatory requirements will continue to shape hedge funds
of the future. Compliance costs, including increased headcount, will
favor the economies of scale of larger funds. The price of entry into the
business is already presenting a higher hurdle for start-ups, preventing
the creation of firms in the first place, and may also cause them to
collapse faster. Proven investment expertise alone is no longer sufficient
to maintain a successful enterprise; also essential is proven leadership
and the ability to identify talent and develop successive generations of
leadership.
The skills, experience, and personal characteristics—and their relative
importance—required in a firm’s future leader are most accurately
defined by the strategy, which will be unique to each firm. Firms should
strive for a rigorous process to create a profile of the type of leader
they seek and use that in the succession-planning blueprint against
which to assess any possible contenders, internal and external. When
focusing on what the strategy calls for in a leader, firms should be
careful about giving anyone with a personal connection to the current
leadership the inside track—although, depending on the degree of
fit with the profile, such candidates may certainly be in the running.
Without a board checking on them, founders managing the succession
process can easily fall prey to a biased view of insiders’ capabilities, so
they must be hyper-aware of this potential pitfall.
Many founder-run firms have yet to focus on succession planning, but
as the hedge fund industry continues to mature, we are beginning to
see this change. This should prove to be a good thing for those who
built these firms, to witness continued life and growth beyond their
personal leadership, an enduring legacy. Effective succession planning
calls for deeper leadership insight and management development, and
is also an effective competitive weapon in the war for talent. Those who
seek to build careers at hedge funds will naturally be drawn to those
who demonstrate their commitment to those funds showcasing the
strongest talent and a process that ensures a continued steady hand
at the wheel. This will create value for these firms well into the future.
10HEDGE FUND SUCCESSION: DON’T SELL IT SHORT
Adapting to a shifting landscape.
“Issues that are
most likely to affect
the entrepreneurial
nature of the hedge
fund business are
the regulatory ones.
If anything they
are getting more
stringent.”
–John Rohal, chairman,
Man Investments USA
“Succession planning
can include nepotism.
That’s the 800-pound
gorilla in the room.”
–James C. McKee, senior vice
president and director, Callan
Hedge Fund Research Group
15. 13
Benchmarking CEO candidates: best-in-class profiles (cont’d.)Benchmarking CEO candidates: best-in-class profiles.
Task-focused
Social
Intellectual
Participative
Clear and consise communication; seats expectations succinctly; focuses on
immediate tasks; expresses views candidly
Leadership styles
Approachable; informal, interactive and inclusive; solicits input of others;
responds with interest to their views
Sets high standards; relies on knowledge and expertise; communicates
detailed expectations and information; inclined to stand firm and assert views
Collaborative and patient; open to alternate viewpoints; appreciates idea
exchange; encourages consensus and involvement
Action-focused
Flexible
Complex
Creative
Completes tasks quickly; keeps things on track; persists and follows through;
meets commitments consistently
Thinking styles
Intuitive; generates ideas and alternatives easily; adapts quickly to new
circumstances; can shift directions easily
Focuses on quality; thorough and accurate; designs detailed strategic plans;
concerned about the long-term; works according to a plan
Creative and innovative; looks at issues from multiple angles; appreciates
diverse perspectives; very tolerant of complexity
Tolerates or enjoys uncertainty; comfortable with diversity; handles change
easily; thrives on variety
Emotional competencies
Cool and calm under pressure; emotionally steady; not frustrated easily
Sizes up self and others accurately; anticipates the reactions of others;
appreciates people’s feelings and preferences
Mental energy and stamina; capacity to sustain analytic thinking; tenacity
in the face of difficult tasks; overall intensity of behavior
Adaptable to situations; able to accommodate others’ methods; at ease in
dealing with diverse styles
Willing to tackle risks and challenges; self-assured in dealing with conflicts
and tensions; eager to stretch capabilities
Ambiguity
tolerance
Composure
Empathy
Energy
Humility
Confidence
16. 14HEDGE FUND SUCCESSION: DON’T SELL IT SHORT
Evaluating and
deploying people
accurately
Caring about
others
Making complex
decisions
Relating skills
Good judge of others’ talent; recognizes potential; can size up others’ strengths and
weaknesses; willing to change his/her mind about people; quickly and accurately
gauges person/job/culture fit; balances short and long-term talent needs
Interested in the things other people care about; shows concern/empathy for
other people; available and willing to listen; quick to help others; lets people know
they matter; relates well to others’ needs
Gets specific; digs below the surface; conducts thorough and detailed analysis;
handles long-term issues without losing focus; uses multiple problem-solving tools
and techniques; defines issues/problems clearly; sought out for advice by others
Warm, friendly, relaxed, and interpersonally agile; makes a pleasant first impression
and builds solid relationships; conscious effort to be diplomatic and tactful;
builds rapport well; is easy to approach and talk to; displays a variety of tactics
for relationship building; adept at dealing with complex interpersonal issues.
CEOs: Mission-critical leadership characteristics.
Managing up
Inspiring others
Managing diverse
relationships
Knows how to relate effectively with top management; knows how to
market self; anticipates top management’s questions/concerns/perspectives;
sees issues from an organizational perspective; can sell ideas and solutions
to top management; has presence and gravitas
Skilled at getting individuals, teams, and an entire organization to perform
at a higher level and to embrace change; understands what motivates different
people; builds motivated, high-performing teams, self-assured, skillful
negotiator; communicates a compelling and inspired vision of core purpose
Relates well to a variety of diverse styles, types, and classes; open to differences;
builds effective relationships up, down, sideways, inside and outside; treats
others with respect; understands groups, their positions, perspectives,
intentions and needs
18. 16HEDGE FUND SUCCESSION: DON’T SELL IT SHORT
Allison Walker
Global sector leader, Hedge Funds and Alternatives
ali.walker@kornferry.com
Jane Stevenson
Vice chairman, Board and CEO Services, and leader, Succession Planning
jane.stevenson@kornferry.com
About the authors.
