Bridgewater's Ray Dalio struggled with finding his successor. For billionaire hedge funders, it's a growing concern.
Hollis Johnson/Business Insider
- Big names like David Tepper and Leon Cooperman have opted to close their hedge funds instead of transitioning their business to new management, but investors see more and more founders planning for their funds to live on without them.
- Fund managers have built teams that invest across asset classes, which reduces reliance on the trading acumen of a single person.
- Succession planning can be harder than it looks. Bridgewater founder Ray Dalio told Business Insider he was stunned by the amount of work it took and shared what he learned about the process.
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Hedge funds have long been nearly synonymous with their founders' strategies and personalities, but investors are now looking closely at firms' plans to carry on without their creators at the helm.
Investors say more and more funds should be able to survive a leadership transition. But Ray Dalio, founder and cochief investment officer of Bridgewater, the world's largest hedge fund, told Business Insider it was hard for him to pinpoint how long his succession planning would take.
"When I began my succession process, I thought it was going to take me probably about two years. But when I say I thought that, I also knew not to believe that," said Dalio on a recent episode of Business Insider's "This Is Success" podcast.
As founders age and the hedge fund industry matures, succession planning is a critical question for investors and potential fund employees. Many of the biggest funds have evolved beyond simply managing one portfolio and now offer a range of services, which makes it more plausible for a successor to take charge.
"They're companies, they're small corporations, they're not one PM with an analyst running a single portfolio," said Darren Wolf, Americas head of alternative strategies at Aberdeen Standard Investments. "They're set up to be evergreen structures way beyond a single PM."
What remains unclear is exactly which fund managers will want their company to live on after they're done working.
Several big-name managers opted to close shop in the last 18 months instead of turning over to a longtime lieutenant. Billionaires David Tepper of Appaloosa Management and Leon Cooperman of Omega Advisors are converting their funds into family offices. Jason Karp closed Tourbillion and is now helping with his wife's organic chocolate company. John Paulson closed his London office recently, and hinted last year that he was close to transitioning his hedge fund into a family office.
But there have been some succession success stories. Farallon Capital is back at the assets under management it reached before founder Tom Steyer stepped down in 2012. Dallas-based HBK Investments has been successful despite the firm's founder and namesake, Harlan B. Korenvaes, retiring in 2003. Large quant funds like Renaissance Technologies and D.E. Shaw have ceded day-to-day control to lieutenants while founders James Simons and David Shaw focus on research and other passions.
"An increasing number of hedge funds can absolutely handle a succession," said Joseph Burns, head of hedge fund due diligence for iCapital Network, because they are diversified asset managers with venture capital and private investment arms.
Still, giving up a business you started and grew isn't easy, something Dalio found out when he tried to transition out role at Bridgewater, only to step back in when his replacement, Greg Jensen, was overloaded with top investment and management responsibilities.
Bridgewater is currently run by Co-CEOs David McCormick and Eileen Murray, while the Dalio, Jensen, and Bob Prince all share the CIO role.
'Go out and hire a replacement'
Legendary hedge fund manager Julian Robertson drew investors in because of his personality and strategy. Naming a successor for Tiger Management would have made a lot of existing investors uneasy, according to research from Sandy Gross at executive search and coaching firm Pinetum Partners, but the seeding of his proteges' funds let investors know who he backed without forcing them to make a decision about staying with Tiger under a new leader.
But more recently, Gross found in interviews with senior hedge fund personnel that mega-funds are expected to continue beyond the founder. One unnamed COO told Gross that "there is an expectation we live beyond our founders" today, and not close down just because the founder is ready to retire.
"There are plenty of geniuses on Wall Street, so it shouldn't be hard to go out and hire a replacement," an unnamed hedge fund CFO told Gross.
Wolf said Aberdeen goes into hedge funds "wanting to be invested for a long time."
"We do a lot of due diligence before making an investment, so we want to amortize that time and cost across a long period of time," he said.
Well-known platforms like Point72, Millennium, and Citadel are inherently tied to their billionaire founders, but are made up of hundreds of investment teams and professionals who often operate autonomously. For investors, this structure is viewed as a strength.
"We don't like to see too much of the talent concentrated at the founder level," Wolf said.
Bridgewater's Dalio said that anyone thinking of going down the succession path to should allocate plenty of time. He figured the process would take two years, but gave himself 10, he said on the podcast.
"If you haven't done something three times before successfully, don't bet on your ability to do it," Dalio said.