Introduction

Every year, a surprising number of successful portfolio managers and quant traders decide to change jobs. Despite having a sizable book, an efficient team, and a generous compensation package, they leave their current work environment. But why?

In this article, we delve into the key factors that drive these professionals to seek new opportunities. We’ll discuss book size, compensation and more. 

I aim to inform any portfolio managers (PMs) thinking of a move of things they should consider. Also, it provides a framework for clients to retain and attract PMs based on what their competitors are doing. 

While there are countless reasons for making a change, some are more evident than others. Some factors might be unique to an individual PM, while others are more widely applicable. And the importance of each factor can vary from person to person and can evolve. Unravelling these complexities is one of the most intriguing aspects of my profession.

• So, what drives a portfolio manager to make a move? 
• Are there any recurring themes or universally applicable reasons? 
• Are the push and pull factors the same for everyone?
• How much do they trade? 
• What are they paid?

Reasons for Career Movement

Personal Reasons

There are numerous reasons for considering a job change, with many being highly personal. In this discussion, we won't delve into specific personal reasons but instead focus on some of the broader underlying motivations.

Common personal reasons might involve:

• Dissatisfaction with their role.
• Challenges with a demanding boss.
• Shifts in company management or direction.
• A badly evolving company culture.
• Personal or family circumstances.
• A need to relocate.

Broader Motivations

Beyond purely personal reasons, there are numerous fundamental motivations that, while not exclusive to an individual, still hold personal relevance. We'll examine the similarities between the push and pull factors in these situations. Such factors may involve:

• Seeking higher compensation.
• A larger percentage share.
• A desire for career advancement.
• Escaping unfavourable compensation structures.
• Obtaining a more substantial book.
• Gaining access to a superior platform.

The Role of Compensation

The first and most apparent reason is the desire for higher compensation, often expressed as “I will join you if you pay me more.”

On the face of it, it is a regular request; however, it is not so simple.

Before exploring the pull factors related to higher compensation, let's examine the different components of a PM's pay. A PM typically receives a fixed base salary and a bonus, constituting their total compensation.

Base Salary Considerations

Regarding base salaries, the industry has a standardised approach for PMs. A base of $150k to $250k is standard across most groups, although inflation has made $150k bases increasingly rare. There are outliers, of course, as with any bell curve, but those at the ends tend to be heads of a large team or division, maybe have come from the sell side where bases are higher, or perhaps they are willing to sacrifice bonus for the base, or through tenure have had it steadily increased yearly, 

While the base salary is important, there are some truths that clients making an offer and candidates expecting a higher base salary need to acknowledge and understand.

A PM will not move simply because of being offered a higher base salary. Any that would, I would have serious question marks as to how good they are. A PM is paid on total compensation, so base is a significant aspect, but it only makes up a fraction of their total comp. The bonus is derived from the profit they make. So, a PM wanting a higher base, a higher fixed amount regardless of their performance, would suggest they do not believe in their ability to deliver on the promised performance and so want a backstop; a high base = a wide stop/loss! 

Baffling Bases

A natural objection can be, "I have fixed costs to pay", when told the base is what it is. This only makes sense if they offer you a lower base - which they shouldn't. You would only consider a lower base if huge incentives elsewhere make sense.

I have had a client offer a partner-level PM on a £250k base, a £40k base salary. Yes, you read that right. I thought they were joking. I refused even to present the offer and let them do it. It came with a 40% PnL cut rather than a 20% cut, but still, it was incredible they believed that was acceptable. Eventually, the base reached £150k, but needless to say, the PM didn’t take it, and I’ve chosen not to work with that clown (client) since...

Another funny story: a PM argued he needed a bigger base salary as his kids were about to enter secondary school, and so the increase in school fees meant he needed a higher fixed amount due to higher fixed costs. The audacity was commendable.

Stating your lifestyle costs are increasing out of choice and using that as the reason you want an increase is naïve. Yes, it is a motivation to move. But do not say that to your future boss!

Yes, there are fixed costs to be concerned with – such as a mortgage, school fees, etc. but a PM who can't run a personal budget would set off red flags. Where’s your bonus from last year? Can that not cover it? Is your belief in your strategy that weak you need a base over bonus? 

Another reason PMs may want an increase in the base is an entitlement – "I am moving, so I should get an increased base". This applies to most other roles, researchers, technologists, and for most people who move jobs. PMs, though, are alpha generators. They are there to generate money and get paid a percentage of that PnL. They are not there to provide a service and exchange time for money in a paid salary. If they generate profit, their pay should reflect that fact. If they don't generate profit, their income should reflect that. A modest base increase is reasonable - but a PM’s offer is much more than base. A PM fixated on base is a red flag. 

So, the base isn't and shouldn't be a motivating factor. But it can make or break a deal. Bonus is where the real motivation lies.

The Importance of Bonuses

When it comes to bonuses, there's a considerable amount of variation. 

Bonuses can be discretionary, determined by management based on various factors, or contractual, a fixed percentage of the PM's generated profits.

A discretionary bonus is calculated at the end of the year; it is based on a range of factors, some known, such as the returns you make; some unknown, such as other PM's performance; or more invisible, such as what a manager thinks of you. As the name suggests, it is not written in your contract; it is at the discretion of management, so it is not guaranteed come the end of the year. You still need to walk into the boss's office and hope they recognise your excellent work and give you a share you would be happy with. This uncertainty is not conducive to a good job in the preceding year as it creates games and politics. If it is a fixed percentage, you can get on with affecting the whole rather than the whole AND your slice of the whole. Reducing to a more straightforward format is always better and more motivating. 

Naturally, you may say if I have generated millions in PnL it shouldn't be a long shot, as you can point to the PnL generated, and should management not pay, they know you're likely to walk. However, what if, despite your performance, the fund has a challenging year, or another PM crashed and burned, losing a few million? 

Then at most discretionary bonus groups, netting will come into play. Your profit will be needed to cover the other PM's losses, immediately reducing your net PnL, so you are now getting a share of a smaller pie. Management has a discretionary pay-out because they can adjust to business needs. Why would you remain on a platform where your strategies are at risk to an unknown and uncontrollable aspect, such as another Portfolio Manager? More on netting later. 

Discretionary bonuses are lower

Not only is there the risk of netting and the fact it is not written in your contract, but also the plain fact that most discretionary bonuses are lower than the written form. 

A discretionary bonus would work out at 8-12%. Indeed, nothing to be disgruntled with, and it would represent a healthy return on your work. But, contract payouts at the low end are 12 to 15% on average, reaching 18% to 20% for top PMs. 

25% is rare but not unheard of. In the highly competitive world of multi-strategy funds, the industry is showing signs of standardising towards 20% payouts. Prop groups and family offices have even more flexibility and can go as high as 40/50% - even 60% in rare cases. 

Some may think 12% is decent. However, remember, it's not guaranteed. It's not written. This means it fluctuates widely within groups across the years. Some years it's 8%, another 12%. 

From the PMs I speak to, uncertainty is the killer, not the "low" percentage. 

Oooooh an extra 3%

Moving from 12 to 15% is not a motivator. Why would a PM making 10% on his book and getting 12% move to get 15%? An extra 3%? 

The PM knows the strategy works, they have the data they require, the risk systems are in place, and, more importantly, risk & management understand the risk profile of the strategy. To then move and pull out the strategies if they own the IP, leave, and implement is a massive risk - for many reasons, the strategy might not perform as well elsewhere. All that for 3% extra will not move the needle enough for a PM to leave and join you. Expecting someone to do that is unrealistic; it is not a huge motivator. There needs to be more in the offer than a simple 3% increase in payout. 

All of this refers to if they own the IP. If they don't own the IP, the risk is even more significant! They are not allowed to copy and paste the strategy. They have to come up with something new. So would they risk leaving a working strategy to go and design a new one - even if they firmly believe the new one will be better, for a 3% increase in payout? 

No disco

The overarching motivation is to move from discretionary to contractual payout. A PM on a discretionary deal will naturally be motivated to join a fund that offers a percentage deal.

If you pay discretionary, consider offering your top PMs a contractual payout to help retain them. If you provide contractual ones as standard, targeting groups with discretionary payouts can give you the advantage in a talent-scarce and highly competitive market. 

If a PM is already on a contractual payout, give them an increase in the percentage of PnL cut. But also prepare the offer around all your firm's advantages, whatever they may be - a larger book, better execution to harvest more alpha, increased volatility, wider/less strict or transparent risk limits, etc. 

The Desire for Larger

Show Me The Money

Another significant motivator for PMs is the prospect of managing a more extensive portfolio. Multiple factors contribute to this desire, including the potential for increased profits and bonuses, greater responsibility, and enhanced internal respect.

PMs managing portfolios of $50-250 million, especially when leveraged, already have substantial assets under management. However, when their strategies are scalable and can handle more risk, missing out on additional profits can be frustrating. PMs may feel that their models are not being fully utilised, leaving room for growth that remains untapped. This can be particularly annoying for strategies like index rebalance, where a PM will want to concentrate their bets. 

In addition to the missed profit potential, a larger portfolio can generate more substantial returns in dollar terms.

It doesn't take a quant to work out; a PM would naturally prefer to earn 10% on $500 million rather than 10% on $100 million.

Large funds, with AUM ranging from $10 billion to $50 billion and beyond, can readily offer $100 million, $250 million, or $500 million portfolio sizes to trade. Sometimes, the right PM with a scalable strategy can rapidly scale up to $4-5 billion GMV within a year. PMs with scalable strategies should prioritise finding a platform to support their growth rather than merely pursuing a higher percentage payout.

While increasing portfolio size is an attractive motivator, especially for junior PMs, it shouldn't be the sole focus and must be cautiously approached. Rapidly scaling a portfolio without considering the strategy's capacity can lead to failure. PMs should scale their strategies carefully and thoughtfully to avoid potential pitfalls.

Expanding Universe 

Expanding one's tradable universe is attractive to PMs. Typically, less so to those who are already established with 3/4 different strategies. Portfolio managers can trade what they want within the scope of what they were hired for. 

But for those less well-established, it can be a pain. 

PMs can run into trouble when expanding their portfolio outside the main focus. Hiring researchers or sub-PMs to build a futures strategy while you're a cash equity PM will likely be problematic on some platforms. Management wants to avoid too much overlap, or some funds deny access to specific data sets to prevent you from trading them. This problem is particularly acute for quant traders (not to be confused with PMs in a pod structure). If you face these challenges, it might be time to look. 

Groups wanting to hire top PMs should look here for soft but tangible advantages to add to their offer. Hiring a PM to build a strategy based on their track record of success, but also giving them the freedom to explore and expand into new strategies, can be highly motivating. 

Diversify, Diversify, Diversify 

Related to this, most groups will have a particular style and focus as their niche. Funds constantly seek PMs that can bring new value, always seeking "diversification". 

However, this new value is usually new strategies, & new styles and, so a word of caution as PMs should consider the compatibility of their strategies and techniques with potential new platforms. 

• Is their tech set up for your strategy? 
• Do they have a suitable client base?
• The right prime brokers? 
• The right execution? etc., that will allow your strategy to succeed. 

There are so many cases of funds hiring a bunch of quantitative PMs only to change direction again a year or two later. 

Larger Team

Growing a team is rarely a reason to move. In most places, the cost is passed on to the PM. So, hiring would be part of that budget. If you're generating enough PnL, you can afford to bring someone on. 

However, when the big boy multi-strategy funds throw money at the PM, they will give them a budget to expand and hire separately from their PnL. This acts as a deal sweetener even if it wasn't the underlying reason to move. Therefore, it can be an attractive add-on to an offer you’re making to senior PMs. 

The Impact of the Trading Platform

The quality of a trading platform is a strong motivator for PMs to change jobs or to remain where they are.

While what constitutes a good platform may vary, it depends on the PM's strategy and style, the fund's overall strategy, and other variables. A good platform should provide the PM with freedom, substantial AUM, flexible risk limits, and minimal overlap with other PMs' strategies. It also includes technical aspects, such as technology, data, risk management, and execution. 

A funds technology stack is one of the most important considerations for a PM. They will always ask about it because it is fundamental to their success. PMs want to know if there will be structural advantages to joining your fund. Micro or milli-second execution? Are endless alternative data sets available? Tick data? Co-location? All this depends on the strategy you want - but these are the most important aspects of an offer. If your tech stack isn't fit for purpose, don't expect PMs to sign up.

The Importance of Execution Quality

When choosing a platform, it's crucial to consider the quality of execution. While often overlooked, better execution can be found due to a platform's size and volume, leading to noticeable gains in PnL. On the other hand, poor execution can be detrimental to performance. PMs should be mindful of potential issues when joining a platform expanding into new areas or lacking expertise in specific asset classes. Geographic location can also impact the quality of execution and access to prime broker services.

Platform attractiveness can be a significant initial draw, though its importance may fade as the decision-making process progresses and the focus shifts to specific roles and compensation. Nonetheless, the platform's quality should not be underestimated.

Risk Limits and Their Influence

The fear of strict risk limits can deter PMs from joining specific platforms. However, a wide range of risk limits are available, and PMs should engage in open conversations to find a platform that matches their style. Clear communication and agreement on risk limits before joining can alleviate concerns and prevent surprises.

The reality is there are many groups with a range of limits. There is a group out that is suited to your style. It's about being open-minded to have a conversation. Then, be clear-minded and resolute in what you will and will not accept. Most groups' risk limits are not an arbitrary number imposed by management. Rather, a carefully considered approach to the market and the strategy. After discussing with the portfolio manager, risk department, CIO, etc., you may have a 5&10 limit. 5% drawdown and your book is halved. 10% drawdown, and you're out. There is a range 3/6, 4/8, 5/10, but it can be pre-agreed and known. So, there is no surprise. There is no fear that you could be cut when you have a 3% DD. If all this is known before joining, it is no longer a hindrance or de-motivating factor. 

Only join a group where the risk limits are known. If you're joining one where they can be changed in a heartbeat, you are not controlling everything you can control and, instead, opening yourself up to some uncontrollable risk. 

In summary, PMs should prioritise finding a platform that aligns with their strategies and styles, offers the appropriate level of risk and reward, and provides high-quality execution. Keeping an open mind and evaluating each platform's merits will help ensure a successful transition.

Reputations 

A PM can rule out a whole group in the opening stages simply upon hearing the name. I fully appreciate they may have had previous bad experiences or previously spoken to them. However, in most cases, it is hearsay, "oh, it's a revolving door", "oh, their risk limits are strict", and "hire and fire mentality". It amuses me how quant PMs look at data all day and then bases a career move on qualitative gossip. The simple fact is a PM should be unique – the best ones have a unique approach, unique style, and unique personality. So they are not the same as the previous ones that left. Things change, and what wasn't right for them doesn't mean it's not right for you. 

Of course, there are groups with bad reputations, some with good reps, and many in the middle. What is essential is finding one that best fits yourself, your strategies, and your aspirations. Sometimes, they will represent high-risk options; other times, it might be a steady eddy. The important thing is to have an open mind. There are always trade-offs. You can have an excellent collaborative feel, with everyone pulling together and sharing ideas. However, bonuses are shared more equally; some people may not pull their weight, and there can be little individual recognition for your work. 

Or you can go to a silo PM platform. Yes, if you have a significant drawdown, you are out. Yes, everyone is in individual teams, with little discussion occurring across teams. However, you're paid concerning what you generate, there is no netting, performance is usually higher, progression can be clearer, and success is far more based on you. 

Addressing Netting Risks

A significant motivation to move is to remove the principle of netting across portfolios run by an individual PM. 

Netting is when PM One makes $20m, and PM Two loses $10m. The fund's net PnL is $10m, and the PM that made $20m is paid on the net $10m - not the $20m they made! 

Netting used to be popular but has died away/gone underground. If you are on a discretionary bonus - you can be sure some netting comes into it. If you’ve earned more PnL but your percentage went down, you may be thinking why. Well, chances are a PM elsewhere in the fund blew up, and your PnL is being used to cover them. 

The only way to remove this risk is to get a contractual pay-out. 

To retain top talent, funds can offer to remove netting risk for their PMs. PMs currently exposed to netting risk should consider seeking opportunities with firms that don't practise netting or negotiate the removal of netting risk from their existing arrangements.

There is room for improvement for PMs who have already addressed netting risk across their portfolios. Some firms may be willing to remove netting risk within a PM's individual portfolio, allowing them to benefit from the success of each individual strategy without offsetting gains and losses. Very handy when growing a team. 

Seeding and Spin-Outs: Opportunities for Growth

For PMs with a maxed-out book size and a strong track record, seeking seeding or planning to spin out and launch their fund can be a viable next step. However, the current environment, with a high rate of hedge fund closures and startup failures, makes it challenging for new funds to succeed.

Seeding and spin-outs are two distinct opportunities for PMs:

Seeding: Some hedge funds or investors offer capital to PMs for trading, allowing them to launch their own fund. The relationship can vary from merely introducing capital to providing office space, IT and trade infrastructure, and back-office systems. Seeding typically requires the PM to have an excellent and long track record to secure the necessary capital.

Spin-outs: This option suits PMs not ready for independent seeding. PMs join a hedge fund as a standard in-house PM, building their track record and trust within the organisation. At a pre-agreed point in time and performance, the PM can spin out and become a separate fund. This arrangement allows PMs to gain more experience and establish a robust track record before launching their fund.

Launching a fund independently can be challenging, as PMs must effectively trade, market themselves, and raise enough assets to sustain the fund. The most common reason a hedge fund fails is for administrative reasons. A PM is distracted trying to raise capital or needs to learn how to handle compliance. Or is it trying to do so many different things they let the strategy slip. 

The alternative routes of seeding and spin-outs provide PMs with the support and resources necessary to launch their fund successfully.

Conclusion

In conclusion, the decision for a Portfolio Manager to transition or seek growth is multi-faceted, influenced by a blend of personal and professional factors. The allure of better compensation, the opportunity to manage a larger book, the quality of the trading platform, and the potential to seed or spin out their own funds all play crucial roles in this decision-making process.

However, it's not just about the tangible benefits. It's also about aligning with a platform that resonates with their unique strategies and long-term career aspirations. It's about finding a place where they can leverage their skills, grow their portfolio, and, ultimately, make a significant impact.

While the landscape can be complex and filled with trade-offs, being open-minded, diligent, and strategic can guide Portfolio Managers towards the best possible decision for their career trajectory. Whether you're a Portfolio Manager contemplating a move or a firm seeking to attract or retain top talent, understanding these motivations can provide valuable insights and shape successful outcomes.



If you found this article insightful, please like it and share your thoughts in the comments section. Your feedback is greatly appreciated. 

If you're a Portfolio Manager considering a career move or a firm looking to attract or retain top talent and would like to discuss these topics further, don't hesitate to reach out. I'd be more than happy to have a conversation. 

You can reach me at henry.booth@quantlink.co.uk or message me on LinkedIn. 

Let's navigate this complex landscape together.