Year End in Review: Labour Hoarding and Its Potent Consequences for the Upcoming Bonus Season.
Assessing the Long term Sustainability of Finance's Exuberant Hiring Spree: Are We Approaching a Turning Point?
The finance industry, particularly in the realm of long-short quantitative strategies and proprietary trading, is experiencing a period of significant transformation and consolidation. This shift, marked by a growing cost base against a backdrop of lower growth, presents unique challenges and opportunities.
This article seeks to explore some of the big questions leaders of companies, risk takers and staff members are inevitably confronted with during this period of transition.
There is little doubt that during 2020-2022 there was an incredible frenzy for hiring across the board in finance, compensation budgets skyrocketed, as did candidate expectations, resulting in teams swelling in size over a short time frame.
In 2023 the overheating in the market began to simmer, yet PnL has not kept up with recent years record performance levels and the resulting impact has been a pivot towards trimming under-performers and downsizing in non-core pockets of the business.
1. How Has the Recent Hiring Frenzy Affected Team Dynamics and Culture in Finance?
The Dual Perspectives:
Tech Talent Integration: The influx of tech talent within the industry has led to a culture clash. While this diversity brings fresh perspectives, it also introduces challenges in adapting to the high-pressure finance environment.
Response to Pressure: Finance firms must balance the innovative mindset of tech professionals with the traditional resilience required in finance. This opens an invitation for further vetting of future hires, prioritising those with direct exposure to high stakes projects with short time to delivery conditions that resulted in significant business impact.
Onyx Alpha Partners' View:
We see this as an opportunity for firms to foster a more adaptive and innovative culture, blending the best of tech and finance. Achieving the equilibrium of blue sky innovative research and development leveraging emerging AI technologies, with delivering on well-defined business problems, is a feature that highly successful firms will need to get right to win big in 2024.
Actionable Insights:
Hiring managers should focus on cultural integration, using active role-play simulations during interviews to assess candidates’ adaptability to high-pressure situations. A key question this exercise should answer is: “Has this person demonstrated an action they have taken that has pushed them beyond the limits of the system they have operated in?”
Expert Quote: "Diverse teams combining tech and finance skills are proving essential in today's dynamic market, however striking the balance presents with it many challenges that we are still grappling with" says the global director of recruiting at a top prop trading firm.
2. Are Current Compensation Models Sustainable in Light of Market Changes?
The Dual Perspectives:
Compensation Expectations: There's a growing mismatch between compensation expectations and value contribution per capita, particularly in firms that have expanded rapidly. Such is the problem, the level of unsatisfied team members is growing, spurring top talent to resign in confidence they can get paid better elsewhere.
Market Realities: The current market scenario, with reduced returns, necessitates a more sustainable compensation model. In an environment where conditions are recalibrating, so too should expectations on compensation, where emphasis might be put on the premium of the platform to achieve success. The rise in multi-strategy firms with clear pay-out models has increased pressure on the era of discretionary pay in PnL generating roles.
Onyx Alpha Partners' View:
An ongoing strategic review of compensation models is essential to align them with current market realities whilst ensuring profitability continues irrespective of the phase of the business cycle. Leaders must use creative levers to not only attract but retain top producers where exceptional talent is in short supply.
Actionable Insights:
This presents an opportunity for leaders to communicate transparently with their teams about changing compensation structures, setting realistic expectations, and exploring flexible incentive models that reward exceptional contributions. Leaders are encouraged to widen the aperture to include innovative reward structures through conducting opt-in pilot tests with employees, evaluating the changes in performance in team members over time, and undergoing firm wide roll outs if successful.
Case Study: A leading trading firm successfully transitioned from a discretionary model to a formulaic, performance-based pay-out compensation model, aligning individual success with company growth. This change has delivered a huge boost in employee retention and brought with it a new talent pool, providing deeper market liquidity for top talent.
3. How Are Firms Balancing the Risk of Talent Loss with the Need for Cost Management?
The Dual Perspectives:
Labour Hoarding: After years in pursuit of higher returns, many firms are reluctant to let go of talent due to past investment, risking compensation dilution with more mouths to feed. The invested time in staffing internal recruiting teams, advertising, recruiter fees, plus training and integration is something many are afraid to cut their losses on should a “soft landing” in the market materialise.
Splitting The Alpha: Firing whole teams who eventually wind up dispersed at different teams across the industry, inevitably will rebuild and replicate their portfolios. Rather than the strategies being housed under one roof, they can end up being housed under 4 or more. The impact has a net negative impact to the ongoing challenge of overcrowding, in fact it leads to the shrinking returns available to capture, where when one team starts to bleed losses, they all do.
Strategic Downsizing: Others are opting for strategic downsizing to maintain financial health. Rather than hoarding staff, or clearing out entire desks, some chose to reduce their exposure, sizing down their risk and redeploying teams towards higher return on capital endeavours.
Onyx Alpha Partners' View:
We advocate for a balanced approach, where firms evaluate talent based on both current performance and market conditions, nurturing future potential by providing support to help talent extract maximum value from their ideas. It’s important to make decisive choices early in order to benefit from strategic realignment ahead of the competition, while always keeping an awareness of special situations that arise.
Actionable Insights:
Executive leadership should focus on identifying key talent that drives growth and considering strategic reassignments rather than deep cuts. Driving efficiency calls on leaders to tap talent in underperforming areas to hone skills in those that are of strategic importance from the perspective of return on capital, stimulating performance with creative incentives such as dual mandates with increased responsibilities.
Emphasis on dual mandates is key, since retaining subject matter expertise — essential for talent feeling they still have control over performing in areas that are familiar to them — whilst also taking on a new strategy or asset class, represents growth and gaining complementary skills by adding value in growth areas.
Industry Insight: “Strategic realignment is vital for firms navigating the current market complexities. That’s where visionary leadership makes the difference, the simple act of reallocating resources to assets with higher yield is a no-brainer and is true for capital and talent” notes a senior portfolio manager at a quant multi-manager fund.
4. What Does the Industry Consolidation Mean for Mid-Tier and Top-Tier Firms?
The Dual Perspectives:
Opportunities for Top-Tier Firms: The consolidation offers top-tier firms, opportunities to expand and absorb talent from struggling competitors. There is a growing expectation that acquisitions will increase, exacerbating a two-tier system of major and minor players.
Challenges for Mid-Tier Firms: Mid-tier firms may struggle to maintain growth, facing an increase in layoff rounds and market withdrawal of non-core competency areas. Underperforming business units, saddled with high fixed costs comprising of technology investments and wages, will likely force mid-tier firms to solely focus on areas where they have a clear competitive advantage and side-step those which yield meagre returns relative to the investment required.
Onyx Alpha Partners' View:
This shift represents a structural change in the industry, with larger firms increasingly dominating the landscape. It also presents a unique opportunity for smaller firms to access talent at a much more accessible price point from fledgling mid-sized firms unable to keep pace with their larger rivals.
Creativity is key to leverage this change. The typical route of choosing full time hires may satisfy the business needs however they can be costly, consider other routes such as recruiting “senior advisors” or “external consultants” which offers a more flexible arrangement to bridge the knowledge gap. The benefit here is exchanging expert knowledge for paid advice for talent in transition, employing talent as third-party contractors rather than full-time staff. Control to limited access of information can be a work around for IP protection and cumbersome non-compete clauses.
Actionable Insights:
Where possible businesses should explore strategic partnerships and acquisitions to strengthen their market position. For mid-sized firms, doubling down on niche areas could be a critical strategy strategic pivot, in contrast to spreading their focus areas too thin in the hopes of achieving diversification. For sophisticated trading firms this could include pursuing returns in less crowded, more esoteric parts of the market which are inherently riskier, in contrast to larger platforms who seek to squeeze out more performance from the developed markets where they represent large market share.
Expert Opinion: "Mid-sized firms must innovate to compete in this increasingly two-tier market; what worked for the last ten years may not be the right business model for the next ten years" says a head trader at a leading global proprietary trading firm.
5. Conclusion: The Time is Now - Ushering in the New Era in Quantitative Finance
In this evolving landscape, firms must balance growth with sustainability, and talent retention with financial prudence.
Job hunters too must balance near term compensation hikes with sustained investment in technology and visionary leadership.
Investing more time in planning one’s career, seeking expert support from experienced advisors who can guide them through the nuanced choices of where to propel their careers is a sure way to maximise success.
We offer deep expertise in:
Market Insights and Industry Trends Analysis
Diversity Strategy and Talent Pipelines
Talent Acquisition & Representation Strategy
Strategic Career Planning and Advisory
Interview Preparation and Resume/Business Plan Diagnostics
At Onyx Alpha Partners, we believe that understanding these dynamics and adapting strategically is key to thriving in this new era of quantitative finance. We are well positioned to help clients and job seekers achieve exceptional outcomes in these moments of transition.
“Our firm is committed to connecting the most sought-after talent in the financial world to opportunities that expand the universe of unconstrained performance within their chosen discipline. If this aligns with your strategic aspirations, we encourage you to reach out and explore the potential for growth and unparalleled success.”
Onyx Alpha Partners | Founder & CEO, Theodore Morapedi.
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