Silicon Valley has made top data science talent too expensive for many hedge funds, so they're getting creative to compete

Point72

Steve Cohen's Cubist arm recruits from other quants and grad programs.

• Hedge funds have always been able to recruit analysts and traditional stock-picking portfolio managers from investment banks, but have run into trouble convincing coders and data scientists to choose Wall Street over Silicon Valley, industry observers say.
• Just "throwing money" at top graduates from Ph.D. programs has not worked because, industry sources say, hedge funds are being outbid for this type of talent.
• Funds are now getting creative with the ways they recruit this type of talent, with Silicon Valley-like hack-a-thons or guarantees to work on a new internal product that is more start-up-like.

On one side, there's billions of dollars from the world's biggest investors ready to be run by your algorithm. On the other, there's a chance to work at the most talked-about companies on the planet - right as they promise to turn their employees into millionaires overnight.

The battle for top tech talent between Wall Street and Silicon Valley is nothing new, but it's reaching a fever pitch in the hedge fund industry, industry participants and consultants say, as both sides eye billions of dollars up for grabs thanks to a host of buzzy tech unicorns expected to go public like Uber, Slack, and Pinterest.

This Silicon Valley gold rush has forced hedge funds to grapple with a problem it hardly ever runs into: The industry is being outbid for the top talent.

See more: The explosive growth of quant investing is paving the way for 'super managers' in the hedge-fund industry

"The only way hedge funds have been able to get [top tech talent] is by throwing money at them, and that's not really working in the same way it used to," said Vickram Tandon, an industry headhunter.

If you're a Ph.D. with a machine learning background, the "demand from Silicon Valley is unquenchable right now," said Ross Garon, head of Point72's Cubist unit.

"Absolutely we would love to have those guys," Garon said, but the offers from Silicon Valley are more than the finance world is willing to pay.

An explosion of alternative data sources pouring into hedge funds has increased the demand for data scientists and others that can build specific infrastructure to actually put the millions of dollars of data to work effectively, for example.

But funds rarely have the personnel in-house to build out this infrastructure, said Erkin Adylov, CEO of data analytics company Behavox that helps funds with compliance, "because that type of talent is typically taken out by someone like Netflix or Google or Amazon."

A Wall Street Oasis survey at the end of last year found that quants at Citadel, Two Sigma, Man Group, D.E. Shaw, and Millennium made an average of $163,000 base salary with an average bonus of $100,000.

A project lead position at top Silicon Valley firms that many top machine learning specialists would be qualified for command salaries in the millions, according to quant recruiters. And their compensation package usually includes either stock options or an ownership stake in a still-private company.

See more: Inside the Lyft roadshow in NYC where investors packed the penthouse of a $1,000-a-night hotel

Not hiring right out of undergrad

For Cubist, the sweet spot is people who have finished grad school or a Ph.D program, or hiring laterally - top pools of talent that are increasingly coveted. Big-name tech companies offering massive salaries right out of grad schools are tough to beat, and these Silicon Valley mainstays have more name recognition thanks to their consumer brands.

Tandon said funds will offer a chance for a quant finishing grad school to work on something that feels "more fintech-y" to lure them in. He pointed to Goldman Sachs' new credit card with Apple as an example of a project that would catch the eye of sought-after coders.

Other shops have borrowed from the Silicon Valley playbook and are holding hack-a-thons, where programmers and coders work in a team to try and solve a problem or create a new design in a set period of time, with a cash prize and a job offer on the table for the winners, said Jonathan Doolan, principal at Deloitte's consultancy Casey Quirk.

At Cubist, Garon believes the immediate feedback from the market or clients on an idea is a big selling point for finance over Silicon Valley.

"You're going to see every aspect of the process from data, to signal, to portfolio construction, to execution and results," he said.

When you're researching a trading strategy, it's possible that within weeks or even days later it gets deployed and "you get immediate feedback from the market whether you did a good job or not," Garon said.

See more: Inside the Chicago hedge fund turf war between billionaire Ken Griffin and Dmitry Balyasny

Hot commodity

Poaching quants from a rival fund is a challenge for reasons both technical and not. The reliance quant portfolio managers have on their systems, technology infrastructure, and data make them harder to poach than a traditional stock-picker, and hedge funds are increasingly saying that retaining their top talent is a top focus.

EY's annual survey of its hedge fund clients found that a fourth of respondents listed "talent management" as their number one strategic priority - only "asset growth" received more first-place votes. A majority of firms put it as a top-three strategic priority.

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A recruiter at a top quant firm said it takes a new quant portfolio manager anywhere from three to nine months to start trading because of the systems, data, and software that has to be pulled together. By comparison, a traditional long-short portfolio manager can get going on their first day.

Michael Graves, who was a top portfolio manager at Cubist and is starting up his own fund, said he is hoping to keep his team small, and is looking at "really niche-y roles" that can only really be filled from recruiting from other managers.

"I'll say I am looking for a short-term futures guy with Python [coding abilities] and two years experience, and once you narrow that down, there's really only like five or 10 guys out there that fit the bill," he said.

"There's just not a lot of supply" of that type of experienced people, he said, and his team has looked into "alternative ways to recruit" like LinkedIn campaigns over using traditional recruiters, which can be pricey for a start-up.

To get people from top funds to join a new fund, "you have to offer at least the same amount of money in both compensation and in capital, and a cooler environment," Graves said.

"We like to tell people that you can come here and do cool shit, make a little money, and make people happy," he said.