Confessions of a Hedge Fund Manager

Being corporate

Paying people

After we passed $100 million in assets under management in the fall of

2003, spring of 2004 quickly took us above $200 million before levelling

off just under $300 million. We were not doing anything new or better. In

the eyes of potential investors, however,

we were no longer a risky start-up fund,

but instead a growth story with a stable, if

boring, return profile. Around this time,

the hedge-fund industry was seeing massive

new investment in general and a big part

of our growth was undoubtedly down to

some of our investors looking for places to

put their new capital. Not that we minded.

In the space of 18 months we had gone

from a no-hope start-up to become a decent-sized hedge fund with a prom-

ising outlook where everyone was paid well. How quickly things can change.

We all relished getting salaries. What a concept: you actually get paid to

work! Our framework agreement on relative compensation meant we could

avoid the awkward conversations that often cause great friction in small

start-up companies. We had agreed that the three of us would make the

same amount of money until we all made £250,000 per year. Once the firm

reached a size where the three of us could make that amount and still have

more money to go round, we would re-evaluate things. As I owned 100 per

10

In the eyes of potential

investors, however, we

were no longer a risky

start-up fund, but instead a

growth story with a stable,

if boring, return profile.

90 B ec omi ng th e real de al

cent of the business, it was easy for me to say that ‘we’ would decide what

happened next, but Brian knew I would not take advantage of this. The

mutual trust that came with our long friendship had helped cement our

business relationship. I had wanted this compensation agreement to avoid

precisely the destructive friction that sharing equity ownership can create

in the early stages of a firm when there is already too much uncertainty.

Unfortunately my fears of frequent divorces in the hedge-fund industry

were proven correct eight months after launch.

It had been clear for a while that the personal dynamic between

Massimo on one side and Brian and me on the other was not working. It

was perhaps somewhat unfair to judge this sort of thing during a period

of such stress and hardship, but constant bickering had rendered the office

environment unpleasant for all of us. We knew that Massimo had an oppor-

tunity to attend Insead for business school that would expire when classes

started in September. As a result we made the difficult but probably mature

decision to part ways over the summer. Typically for the hedge-fund indus-

try, none of our investors took much notice. Brian and I had a replacement

lined up weeks in advance in the form of Alberto Lage from Spain, who

stayed at Holte Capital to the end. To the investors this was just another

personnel change. It was a strange feeling that something so important to

us, losing one-third of our team, mattered so little to the outside world:

another symptom of the insular world of the hedge fund.

In all my time working in hedge funds I still don’t think anyone has

come up with the optimal solution to ownership and compensation struc-

tures, if indeed such a thing even exists. It later had massive benefits to me

to own 100 per cent of the business, but, like all owners, I felt that the firm

could not exist without me and that I paid those who worked for me fairly

– I don’t think I ever had anyone leave because they were dissatisfied with

their compensation.

Expanding the team

‘Everybody wants to join a hedge fund these days; finding someone will be

easy’, people used to tell me when I talked of difficulties with recruiting to

match our growing assets. The eagerness people had to join the industry

often reminded me of the Internet revolution I had experienced at HBS