The Gig Economy Comes for Hedge Funds

The explosive growth of the gig economy is one of the most important labor-market trends to emerge since the 2008 financial crisis. Companies offering ride-sharing, do-it-yourself property rentals and a host of other services have upended traditional sectors. It was only a matter of time before the gig model moved to hedge funds, becoming the industry’s fastest-growing segment.

If the trend continues it could have a big effect on financial markets by making it easier for a wider assortment of unconventional managers to rise in the industry and offering investors better and cheaper access to them.

Much like any gig company, hedge fund platforms connect customers (investors) with service providers (money managers). A key feature is that providers, managers, in this case, can offer their services on multiple platforms, or independently work directly with investors. The main appeal for managers is they do not have to choose between the risk and trouble of starting their own funds and the restrictions of working for an asset management company. The gig platform provides many of the centralized services and some of the security of having an employer, with the freedom to grow your own business.

On the investor side, a gig platform offers access to many niche and new managers, who would be difficult and expensive to find if they were independent funds, or their alpha would be buried if they were employees of large multi-strategy funds. The gig platform can provide rigorous manager selection, offer extensive performance oversight, and enforce tight financial and risk controls, without the expense of a fund-of-funds.

This trend is being driven by inexorable economics. All net new investment in hedge funds is going to multi-manager funds, with the rest of the industry flat or shrinking. Single-strategy hedge funds cannot compete for talent with the platforms. The best managers want the freedom to run their own business, with the convenience and security of working through an established large platform.

Keeping the full performance fee on individual performance is another strong appeal for the best managers. In a large hedge fund, you need both good personal and firm performance to be paid as an employee. In return, you get a comfortable amount and keep your job for a while even if your performance is poor. But the best managers and the biggest risk-seekers prefer to be fully compensated for personal performance regardless of the firm’s results. The downside is that your capital is ruthlessly cut if you lose money, and you can be fired quickly.