Long Non-Compete? Why Some Quant Traders are Choosing To Quit, Take a Year Out, and Return When The Market is Hot🔥
The shift in employee attitudes towards job mobility in the age of everlonger non-competes.
Introduction
In the fiercely competitive world of quantitative trading, non-compete clauses have become a battleground. As firms seek to protect their proprietary algorithms and trading strategies, the length of non-compete clauses has steadily increased, prompting a significant shift in the career strategies of quant traders.
This article delves into the rationale behind this trend, the perspectives of employees and employers, and how strategic talent solutions can turn this challenge into an opportunity for growth and innovation.
NB: For the ease of readership, the label “quant traders” refers to traders, quant traders, quant researchers, and portfolio managers that leverage sophisticated maths/stats models instructed by algorithms to buy and sell securities.
Key Takeaways:
The force driving the increasing duration of non-compete clauses in quantitative finance.
How these extended non-competes are influencing the decisions of quant traders to take sabbaticals during calmer markets.
The job market dynamics resulting from these trends and their impact on talent mobility.
Onyx Alpha Partners' strategic approach to talent pipeline management in this evolving landscape.
The Rise of Long Non-Competes:
Non-compete clauses, once a mere formality in employment contracts, have now become a significant consideration for quant traders. The motivation for firms to enforce these clauses is clear: the protection of intellectual property and the prevention of immediate competition. However, the consequences are far-reaching, affecting job mobility and career trajectories.
Employee Perspectives
For many quants and trading staff alike, a long non-compete can be a deterrent, yet some see it as an opportunity to recharge, re-educate, or explore other interests. This 'enforced sabbatical' can be a time of personal growth, but it also comes with financial implications and a potential disconnect from the fast-paced trading world.
At a minimum non-compete periods can start from as little as 3 months and in some cases extend for more than 2 years. At the extreme there are instances where there can even be a lifetime non-compete (albeit the enforceability of this is undeniably questionable). Creative ways employers legally enact this deterrent come in the form of proportioning an employee’s accrued compensation held in private shares tied to the company’s performance. However, these typically high yielding dividends are revoked\clawed back if the employee choses to leave and work for a competitor. Such methods are widely known as the “golden handcuffs” where the price to leave is simply insurmountable for the large majority of employees and employers.
Still, the prospect of being paid not to compete, in other words being paid handsome sums of money to enjoy life free from the pressure cooker of work, sounds amazing right? Imagine the time you could utilise this to travel around the world, learn new languages, raise your children at key moments in their lives and pursue those personal goals that work got in the way of.
Not so fast. The drawbacks become all the more real when the glossy shine of working for a top performing trading group wears off and the reality of the restrictions sets in. The unknown unknowns can derail what some may believe will be a job for the long-haul when they sign the iron-clad binding contract. However, what happens when your boss suddenly takes prolonged sick leave, or your team endures a sudden decline in performance, turning the days of riding the waves of stellar performance into the agonising hours of fighting for survival? How does one predict the internal challenges that come with rivalry among team members for resources and fallouts over compensation. Even a change in one’s own personal circumstances can all be reasons why someone may decide to leave what otherwise would be a well-meaning job.
Such stress can be exacerbated when the morale changes at the office, thrusting forward the possibility of moving on for greener pastures. Then comes the consideration of your next move, where potential competitors weigh up the pros and cons of waiting out a lengthy non-compete, litigation concerns associated with recruiting from companies known to sue, along with a significant compensation hurdle to overcome.
All of these factors combined are ushering in a wave of talent who are betting on themselves getting a better job and making it easier to get hired ahead of their competition. How? By resigning without a job, in some cases before bonus period in order to try and negotiate down their sit-out period and get back in the markets sooner rather than later.
Rogue Quant Traders Starting The Clock on Non-Competes
Riding off the tail winds of several years of record performance and generous compensation has emboldened a growing number of specialised quantitative trading talent to jump ship, cashing out at the top, with enough savings in the bank to trade the prospect of earning more in the short term, over taking risk that a new venture will yield high profits over the long term. This cohort of the job market also recognises their skills will continue to be in demand, so de-risking this for future employers is made easier if their skills are ready to be deployed on a shorter time horizon in anticipation for a hot and volatile market. After all, the popularity of strategies and specialised knowledge is cyclical, alpha decay has a short half-life, therefore the opportunity set could be substantially different in two years’ time.
This category of quant traders are often choosing to make good use of this career hiatus by upgrading their toolkit, diving into complex courses on machine learning and artificial intelligence, priming their skills to be future proofed from the rise of the machines. Others are taking the time to do some soul searching, traveling the world and gaining the street smarts of being immersed in new cities, cultures and landscapes that one inevitably has sacrificed by committing a lifetime to building high performing trading models (and/or) systems. One thing is for sure, it is giving rise to a new breed of talent that will return to the market, arguably with a more wholistic and competitive range of skills armed for opportunities of the future.
Employer Perspectives
This trend is net positive for employers in the long term, particularly those who embody diverse talent (enriched with diverse life experiences), however in the short term, it is having the opposite effect of what non-competes were intended to do. Employers enforce non-competes to safeguard their business and retain talent, but the practice is not without risks. These include the loss of talented individuals who defect, the cost of legal enforcement, and the potential for creating a stagnant internal culture where innovation may be stifled.
The business of building a successful quant trading group is extraordinarily challenging and requires a seemingly relentless investment in talent, technology, data. Getting the formula right today does not guarantee indefinite success in the future. However, as IP becomes more and more valuable, the risk of competitors eroding away hard-earned alpha, and by secondary measure their market share, business leaders are forced to understandably protect their businesses at all costs.
Punitive non-competes are one mechanism of ensuring that competitors are deterred from wanting to hire their top staff, creating a high barrier to entry for those less-well capitalised outsiders considering luring away their prized assets to build a rival business. The secondary effect is that staff are dissuaded by the prospect of leaving to set up their own businesses. This is because they would be unable to put their skills to work in the markets for a period long enough to have their former employer vanish into the distance. Meanwhile, they are left to figure out how to make their alpha’s succeed in a changed market environment without the support of the platform.
This is a smart move since it decreases the risk for their star talent to go it alone and saddles any future employer with a considerable amount of risk. The financial costs for a future employer can tally up to tens of millions, or even hundreds of millions of dollars to recruit the best people. Then there are a multitude of factors within the execution risk, such as a mismatch in culture, expectations, or sudden loss in form from either the employee or employer can equate to outsized bets that do not pay off.
Mass Market Adoption
The unintended consequences are significant since the adoption of this policy has intensified at a time where there is already a shortage of talent across the industry. These extended non-competes once were only found among elite proprietary high frequency trading shops and niche quant hedge funds - however these contractual conditions are commonplace among multi-strategy, multi-manager hedge funds, and even investment banks (a more recent phenomenon to stem the brain drain of talent to the buy-side).
This widespread adoption is becoming increasingly challenging for employers since they are being forced to pipeline specialised executive talent years ahead of time, in many cases with a one to two year ramping up period. These non-trivial wait times are often at odds with leaderships goals of enacting change by driving results immediately. Leaders of organisations are confronted with the question of can we afford to wait and pay the premium, or are we better off recruiting an exceptionally talented junior graduate and organically developing this in-house?
A case can therefore be made of how these practices limit the agility and creativity of business decisions in times of exponential change for companies large and small.
Market Dynamics & Regulatory Reform
Extended non-competes are reshaping the talent market, leading to shortages in available expertise and driving up the cost of hiring. The founder of Millennium Management recently was quoted by Business Insider attesting to this issue claiming: “the non-competes also created an artificially smaller pool of potential hires, driving their price up”. Firms must navigate this new terrain carefully to maintain a competitive edge.
One of the more obscure effects of an industry wide adoption of this practice is the stifling of competition, a more sluggish job market where the time to hire and the costs to hire have increased exponentially. This is playing a part in the Federal Trade Commission (FTC) and UK Government putting forward proposals to reform the legality of non-competes.
The US Treasury Department estimates that 20% of the US workers are subject to non-competes, a number likely several fold larger within the competitive area of quantitative trading.
There is growing anticipation of legal reforms being tabled that could well end non-competes as we know them, however they are unlikely to come to bare without intense scrutiny from industry participant working groups. This is evidenced by the recent announcement that the New York state will retain the rights to enforce non-compete restrictions, as recently reported by Bloomberg. This is a far from resolved issue both in the US and UK where implementation hinges on elections that will be held later this year and will no doubt be a subject of scrutiny for years to come.
We advise clients to take a proactive approach to understanding how the local legislature is changing by paying attention to the currents driving this within society at large, and experiment with creative ways to retain talent outside of the conventional norms. Focusing on the “pull factor” will be key to incentivising a loyal workforce to protect and grow the assets of great companies of the future.
A Case For Adopting A New Model
While non competes are serving their purpose in protecting the intellectual property of private companies within the finance industry, it is worth enquiring how the industry might look in the absence of them, looking to comparable industries for insights.
We do not have to look too far afield: the technology industry is known for its equally fierce competition for talent, with similar challenges of staff shortages and yet the mobility within the industry is starkly different to that of finance.
Take Open AI, Anthropic, DeepMind, Perplexity AI and Inflection AI - all of these business’ founders are offshoots from big players such as Google, Facebook (Meta), where within a fair short time period (~18months), they have launched, capitalised and created healthy and robust competition to their former employers.
The data tells the tale of Anthropic, a derivative of the well-known OpenAI company has grown 238% (388 staff members) in the last 12 months alone:
Contrast this to a cross-section of quant firms, where 12-month growth numbers range from 10-25% on average with a backdrop of both industries contending with the challenges of a higher interest rate environment it should be stated.
The osmosis of talent towards centres of innovation has forced the dominant tech companies to refocus their investments and resources to a huge market opportunity within the domain of Generative AI.
Consider that this rapid change and unprecedented technological revolution would be inconceivable were all of the founders structurally impaired to launch companies by up to 2 year non competes.
The end result is that the quality of product, services and technology the market receives is dramatically improved at a substantially lower cost. What we can take from this is the competitive forces among the largest technology firms were simply not great enough to drive fast, meaningful innovation, in fact their leading positions contributed to a degree of complacency and bloat. It took bold leaders to take risk by launching smaller and more nimble competitors to drive innovation forward and we are seeing this play out in real time across the world.
This recent phenomenon in Generative-AI has in some ways levelled the playing field for even more competition from smaller companies, while at the same time fast twitch decisions made by larger firms have accumulated huge returns and market value - leading to an extraordinary wealth creation. The thriving and dynamic innovation hub that is the state of California is a living and breathing example of how intrinsic value, competition and talent thrives without the cumbersome red-tape of non-compete clauses.
It begs the question, is quantitative finance ready to embrace the possibilities of such a drastic shift and learn lessons from the technology sector?
Strategic Talent Pipelining
In response to these present challenges, forward-thinking firms are focusing on talent pipelining—anticipating future needs and cultivating a pool of potential candidates, continuously nurturing relationships with otherwise inactive talent. Leaders of such firms have a year-round hiring approach. This strategy ensures an ever-present flow of talent, even in the face of restrictive non-competes. The consequences of the present non-compete dilemma with the shortage of exceptionally talented staff, requires leaders to plan much further into the future, considering what a team may look like over five to ten years.
Building businesses and adding diversification must be thought through the lens of a business cycle and in particular when strategies fall out of favour, leaders must be planning for the recruitment of talent that will add meaningful revenue over a five year time horizon. This accounts for up to a two year sit out period, and up to three years to get a highly scaled up and congruent team producing at maximum capacity. In finance record profits can often be followed by a period of decline and markets resetting - which some could argue is where we are emerging from today, and it’s at these moments where consolidation and investing heavily for future recovery is a prudent move.
Onyx Alpha Partners’ Role
Onyx Alpha Partners stand at the forefront of strategic talent solutions, offering advice and expertise to help both firms and talent navigate the complexities of non-compete clauses. Changes in regulation, employer hiring strategies and employee behavioural patterns all feed into the complexity one must navigate to make informed decisions.
With a deep understanding of market trends and a commitment to the professional development of candidates, whilst focusing on serving our exclusive clientele, Onyx Alpha Partners is uniquely positioned to guide clients towards positive growth and innovation.
Conclusion
The growing trend of extended non-compete clauses reflects the high stakes in quantitative finance. While they present challenges to talent mobility, they also open doors to strategic talent management and development. We are of the belief that firms that embrace a forward-thinking creative approach to talent pipelines, with the support of strategic search firms like Onyx Alpha Partners, will be best equipped to thrive in this dynamic environment.
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