The explosive growth of the gig economy is one of the most important labor-market trends to emerge since the 2008 financial crisis. Companies offering ride sharing, do-it-yourself property rentals and a host of other services have upended traditional sectors. It was only a matter of time before the gig model moved to hedge funds, becoming the industry’s fastest-growing segment.
If the trend continues it could have a big effect on financial markets by making it easier for a wider assortment of unconventional managers to rise in the industry and offering investors better and cheaper access to them.
Much like any gig company, hedge fund platforms connect customers (investors) with service providers (money managers). A key feature is that providers, managers in this case, can offer their services on multiple platforms, or independently work directly with investors. The main appeal for managers is they do not have to choose between the risk and trouble of starting their own funds, and the restrictions of working for an asset management company. The gig platform provides many of the centralised services and some of the security of having an employer, with the freedom to grow your own business.
On the investor side, a gig platform offers access to many niche and new managers, who would be difficult and expensive to find if they were independent funds, or their alpha would be buried if they were employees of large multi-strategy funds. The gig platform can provide rigorous manager selection, offer extensive performance oversight, and enforce tight financial and risk controls, without the expense of a fund-of-funds.
This trend is being driven by inexorable economics. All net new investment in hedge funds is going to multi-manager funds, with the rest of the industry flat or shrinking. Single-strategy hedge funds cannot compete for talent with the platforms. The best managers want the freedom to run their own business, with the convenience and security of working through an established large platform.
Keeping the full performance fee on individual performance is another strong appeal for the best managers. In a large hedge fund, you need both good personal and firm performance to be paid as an employee. In return, you get a comfortable amount and keep your job for a while even if your performance is poor. But the best managers and the biggest risk-seekers prefer to be fully compensated for personal performance regardless of the firm’s results. The downside is that your capital is ruthlessly cut if you lose money, and you can be fired quickly.
The gig structure allows the best of both worlds: full performance fees on individual performance, with the ability to survive on locked-up direct money when multi-manager hedge funds pull your capital or fire you.
While there are no pure gig hedge fund platforms today, nearly all the big multi-manager hedge funds except Citadel — including prominent names like Millennium Management, Point72 Asset Management, BlueCrest Capital Management, Balyasny Asset Management and Schonfeld Strategic Advisors — employ some external managers. Some of these managers are allowed to take money from investors unaffiliated with the platform, but even the exclusive managers find it easy to switch platforms or set-up as independent funds.
Well-received start-up ClearAlpha Technologies has moved closest to the gig model. Its first offering is a commingled fund apportioned among its managers, but it has the platform to act as an exchange, matching investors to individual managers or customised portfolios of managers, cutting out all the expense of intermediaries.
Most of the great 20th century hedge funds were founded by people with dicey resumes, distinguished more by independent thinking and varied careers than by prestige degrees, conventional financial expertise or previous job titles. These are the funds that transformed financial markets and produced extraordinary returns.
But as the hedge fund business became the alternative asset management business, with mainly institutional money and heavy regulation, things changed. The best funds became too large to chase new niche, low-capacity strategies; or they closed to outside money to stay in the low-capacity game. As more funds were started by people with established financial-industry credentials, the start-up costs of new hedge funds rose to levels few independent outsiders could pay. Today, it can be hard to tell the difference between a large hedge fund with multiple products and a traditional asset management company.
The promise of gig platforms for hedge funds is to open the alternative asset management game to a wider variety of competitors, and to offer investors more direct access to niche and new strategies, at a lower cost. It can provide opportunities to independent thinkers without the hurdles of either starting their own fund, or else getting jobs with established names and rising to a level where their ideas can be implemented.
Another effect of gig work is to stabilise hedge fund strategies. Traditional hedge funds had long lock-ups and notice periods for redemptions, allowing them to stick to long-term strategies through unfavorable markets. Non-gig multi-strategy funds are known for yanking capital quickly after losses, meaning the smartest and most aggressive money can suddenly disappear from strategies and asset classes. Gig managers have more staying power because each manager is pursuing a single strategy and has no alternative place to put money.
No one has yet demonstrated that a hedge fund gig platform can attract the best new managers, nor deliver superior returns at a lower cost to investors. No one has even opened a pure gig platform. All existing funds rely at least in part on employee-managers.
But don’t overlook the tremendous appeal of gig work. An estimated 75 million Americans have done at least some gig work. Many are traditional freelancers or people who would prefer regular full-time employment but are treated as contractors for the employer’s convenience. Another large group does occasional casual gig work for a little extra money. But that leaves millions of gig workers who work full-time, taking advantage of multiple platforms and opportunities to build their own independent businesses.
Hedge funds, with their high leverage and aggressive investments, are drivers of financial market trading and prices. If the next generation of hedge fund managers come up via gig work — rather than traditional Wall Street jobs or the discipline of starting and running a business — it means a different type of person will be taking point on the economy’s march. Gig work could change everything.
Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. Views are personal and do not represent the stand of this publication.
Credit: Bloomberg
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