In 2017 hedge funds have effectively made the transition from investment niche for the super wealthy and risk-hungry endowment to becoming an established asset management model that is part of the investment mainstream. However, the nature of the business does not lend itself to deep existential thoughts on the future of the firm. Invariably hedge funds are founder-operated businesses. They are often opportunistic, possess deep skill-sets in one or more trading strategy or asset class, are increasingly systematic and quantitative, and usually have distinct cultures which allow them to take risks, think deeply about the market and recruit/reward those people built in their own image.
But after two decades the natural life-cycle of any business kicks in and thoughts turn towards the future and founder succession. Hedge funds face a unique set of challenges when it comes to succession planning since the reason they can raise capital and manage money in the first place is due to the skill and reputation of the founder(s) themselves.
In this article I will look at succession planning in its widest sense. Not just as a means by which a hedge fund lives beyond its founders but also more holistically; what a hedge fund might look like in the future beyond the specific set of strategies and operating model that the founders conceived initially.
The maturity of the industry over the past two decades, the rise of passive managers and the 2008 financial crisis have all meant that allocators have become more discerning (e.g. in terms of fees/performance), regulators have become more concerned about systemic risk in the market, and LPs have demanded more transparency into portfolio performance and risks.