Hedge Fund Succession Planning
Passing the baton
Many hedge funds are facing the challenge of succession planning. Roughly one-third of the hedge fund industry’s assets are managed by founding principals who will reach their 60s in the next decade. The $600 billion question facing founders industry-wide is will my hedge fund liquidate when I step down, or will it live on because I actively prepared for my succession?
Succession planning is uniquely challenging in the talent-driven hedge fund industry. While a founder remains in charge, the interests of investors, employees, and the founder tend to be well aligned. However, stakeholder priorities may diverge when a founding principal steps down. Succession planning presents an opportunity to create franchise value by harmonizing stakeholder interests during a leadership transition. It can help hedge funds position themselves for the future by:
- Maintaining stability in investment operations
- Minimizing employee turnover
- Growing and retaining assets
- Reducing investor demand for key person provisions
- Mitigating operational risk
- Perpetuating a founding principal’s economic interest and professional legacy
Succession planning is a complex process typically requiring specialized human capital, financial, tax, and legal guidance. In particular, human capital decisions could make or break a succession plan since talent typically drives a hedge fund’s competitive advantage. Focusing on the human capital angle, this report highlights four considerations to help plan for a founder’s succession:
1. Legacy - Fostering a new generation of leadership
2. Selection - Identifying the right successor
3. Grooming - Sponsoring the successor among key stakeholders
4. Timing - Executing succession at the right time
Hedge fund succession planning is a fragile process. Even the best-laid plan can be thwarted by a small group of investors or employees. The critical challenge is balancing a complex set of competing stakeholder priorities. Not surprisingly, most hedge funds avoid publicly discussing succession plans. However, once a credible succession plan has been developed, a hedge fund may want to discuss it more openly. Over time, transparency about succession might distinguish a lasting hedge fund franchise from its competitors.