NEW YORK (HedgeWorld.com)–The bear market was great for filling positions in hedge funds, what with droves of experienced people from Wall Street and the mutual fund world looking for jobs.

“Hedge funds are the only part of financial services where there has been growth in employment,” said Annette Cazenave of Horizon Cash Management in Chicago, who recently hired an associate. “This is where the momentum is.”

By most accounts, the industry retains that impetus. Veteran recruiters see an entrenched trend through ups and downs from month to month. “The brain drain continues,” said Michael Martinolich of Cromwell Partners. “We will continue to see talented investment professionals move from the long-only side.”

Indeed, this process may be accelerating because of the mutual fund crisis . “The economics and the freedom to invest more broadly remain compelling. I don’t foresee that changing,” Mr. Martinolich said.

There is a long-term tendency for different types of money management businesses to reach a stage of development where they build staffs, explained George Wilbanks of Russell Reynolds. In the past few years, this has become noticeable in alternatives, venture capital and private equity as well as hedge funds and fund of funds.

Just Beginning

“Every quarter we see more and more of it,” he observed. “They are all going through a process of maturing as a business.” He noticed a similar pattern in long-only institutional separate account managers, starting in the late 1980s. And before that, from the early 1980s, mutual funds went through a dramatic period of growth that lasted around a decade and involved recruiting professionals from outside the industry.

“The alternative managers are just beginning,” said Mr. Wilbanks. “They still think of themselves as a cottage industry.” Only the very largest firms have so far initiated extensive searches for executives, and only in the past two, three years.

With the exception of the top 15 to 20 firms, most hedge fund managers still hire people they already know and are comfortable with. While they want to make a lot of money, Mr. Wilbanks has found that they also place high priority on working in an environment where they enjoy themselves and are with individuals who are smart and interesting and challenging.

Russell Reynolds has recruited for some of the largest firms, including Soros Fund Management. The firm conducts around 200 executive searches a year in the broadly defined money management arena. In another two years or so, Mr. Wilbanks expects it will be doing 50 to 100 searches annually just for hedge funds–like the new search it recently started for a financial officer for a US$4 billion fund.

Monthly fluctuations do impinge on the long-term trend. In the first two quarters of this year, uncertainty in the market discouraged hiring. But by summer many money managers were confident enough to expand their payrolls. In early fall, recruiters were busy.

In October, however, the mutual fund investigation cast a pall. Many hedge funds got swept up in it and that had a dampening effect on their willingness to acquire new people. But searches picked up again in November, says Mr. Wilbanks.

In addition to other developments, there is an emerging factor that is creating demand for seasoned executives: significant numbers of senior partners in well-established firms are taking early retirement. Trying to replace such people is a challenge and more firms are going to professional recruiters to look for and learn about high-level executives.

Shortage

In the meantime everybody needs investment talent, regardless of what else is happening in the industry. “But hedge funds are very particular about who they bring on, in most cases,” Mr. Martinolich said. “For the majority, standards are still very high in terms of intellect and investment ability.”

In particular, managers in all strategies seek individuals with a proven ability for ferreting out productive investment ideas. For this, they want a knowledge base that runs deep.

“They’re looking for people who can do fundamental, rigorous analysis that goes well beyond the average analyst’s research and whose personality and style allows them to do that,” said Mr. Martinolich. Greg Jackson fit the bill–co-manager of a top mutual fund at Harris Associates, he recently moved to a hedge fund .

A successful candidate for, say, a long/short equity fund needs to give a substantial answer to the question, “In what way do you believe you can add value to a hedged portfolio?” Such people are in strong demand but of course their supply is limited. Mr. Martinolich believes many hedge funds would quickly hire more people if it weren’t for this bottleneck.

“Our biggest problem is finding strong enough talent to join well-regarded hedge funds,” he commented. “There are many shops with US$300 million to US$400 million that would like to add another portfolio manager or another analyst or two. But there is a shortage of people that meet the criteria that these managers would like to hire.”

For all the financial and other incentives alternative investment businesses offer, insiders advise being realistic about the jobs and the work. In an era of subdued investment returns, expectations need to be moderate, suggests Hilary Till, who started her own firm, Premia Risk Consultancy Inc., in Chicago. Many newcomers aspire to eventually developing their own business.

“It’s not like being a rock star, it’s more like being an accountant. It’s just hard work,” said Ms. Till. She advises that people go into the industry if they enjoy the work rather than being drawn by a myth of glamorous living.

Mr. Martinolich agrees that investment work is not easy. “It is always on your mind. You take it to vacation with you,” he said.

Jobs not directly related to investment may be easier to find. Because the industry is so diverse, there is room for different skill sets, said Ms. Cazenave. While there is a learning curve for new entrants, many skills from the mainstream are applicable in a hedge fund environment.

“You see people coming into the alternatives field from all different walks, whether from technology or management or marketing,” she said. How do potential employers decide a person will fit into a hedge fund setting? “In hiring, we look for a skill set,” said Ms. Cazenave.

She and others agree that it is much more difficult to teach a skill than it is to teach a product. Knowledge of the alternatives industry or the hedge fund market is a plus, but the deciding factor is possession of certain core skills.

CKurdas@HedgeWorld.com