Patrick O’Shaughnessy, Peng Zhao, and Michael Recce don’t work at hedge funds. But collectively these three illustrate a formula for the future of hedge funds, fund data operations, and big-time investing generally.
Think of the equation hidden in their stories as stats scientist + strong leadership + cultural change management + data operations = hiring people. Most business leaders would agree that hiring and people placement are two of the most critical factors in controlling results-based outcomes. These three examples would certainly help strengthen that hypothesis.
Patrick O’Shaughnessy is the CEO of asset manager OSAM. Peng Zhao is the CEO of Citadel Securities, the market-making arm of a hedge fund. Michael Recce is the chief data scientist for the fund of funds, Neuberger Berman.
The hedge fund world and what are called actively managed funds are seeing closures and layoffs. But OSAM is launching a new technology product. It’s run by a small team, and it’s hard to say whether they are hiring. But they appear to be moving in the right direction. Citadel Securities is clearly hiring and growing. Neuberger Berman, which includes a major hedge fund business, increased headcount by six percent in 2018. They have continued to hire when others in its industry are shrinking.
In the case of each, they figured out how to identify leaders trained in statistical principles. They found a way to evolve their organization to think about their work not as a set of tasks, but as managing clouds of data. These three matched that with data and software infrastructure that could keep up with the task. Each launched new products and initiatives that are profitable and people are willing to pay for. That leads to hiring.
Start with the head of $5.7 billion quantitative asset manager OSAM, Patrick O’Shaughnessy, and their software product called Canvas. It’s designed to help investors develop customized investment portfolios.
O’Shaughnessy is different from Zhao and Reece in that he does not have a statistics education. But he represents the kind of people, like Zhao’s boss – Ken Griffin at Citadel, who understand that data is the core of their business and that they need to find the people like Zhao and Recce to organize what the firm does increasingly around the data to make that data easier to use.
O’Shaughnessy explained the genius of developing a software product to better understand asset managers’ customers in his quarterly letter at the conclusion of 2019 –
“I think everyone would benefit from building client-facing software,” said O’Shaughnessy. “Doing so helps you understand your clients in the deepest way possible. In the past, when we’ve asked clients what problems they are trying to solve, we didn’t get actionable answers. In sharp contrast, when we demo a flexible software chassis like Canvas to prospects, they project their real problems onto the software in the form of the question: ‘Can it also do x?’”
Like father, like son
The irony of OSAM’s software product is that the previous CEO of OSAM, O’Shaughnessy’s father James, attempted to launch a software-driven investment management business in 1999. Two years later it closed amid the dot-com bust. Many internet tech companies discovered they couldn’t make enough money to justify the expensive infrastructure and talent to make their businesses work.
Five years later cloud computing infrastructure was built that has made it cheaper to test and prove businesses that use massive amounts of data. Now the power of big data operations is changing how we think about businesses and fund data operations.
In the hedge fund world, that wave of change is now washing through the industry. The layoffs and closing of legendary businesses are continuing. But Zhao and Recce show how O’Shaughnessy’s formula works on a larger scale for even bigger fund titans.
Citadel Securities is often called the market maker arm of the hedge fund founded by Ken Griffin, Citadel. This wing of Griffin’s empire just announced it’s opening of a new office in Austin, Texas. Over the summer the firm embarked on a Silicon Valley hiring bonanza. That’s not to mention Citadel Securities’ reported $3.5 billion in revenue last year, and its claim to have handled one in five shares traded in the U.S.
Many on Wall Street are asking what is driving Citadel’s success. Those looking to Griffin for the answers might be asking the wrong person. The firm’s emergence as a dominant force in trading really began with the appointment of Peng Zhao as the CEO in 2017.
Zhao was born in Beijing. He has a doctorate in statistics from the University of California Berkeley. He rose from being a relatively unsung quant at Citadel to an executive. Now he is making waves, driving more direct public listings for instance. This is one defining achievement of his tenure. Silicon Valley unicorns like Spotify, Uber, and Slack have hired Citadel Securities to manage their IPOs.
Bigger lessons in fund data operations
But there’s a more important if less visible, lesson to take away from Zhao’s success atop the computerized trading firm. Gaining a competitive edge in 2020 requires someone who understands how big data culture works in the financial sector culture. Actually cultural acceptance is one of the most deceptively important factors for data operations to soak into any industry, as the former head of Twitter’s data science team, Jeff Ma, has pointed out. That’s true from money ball in sports, to fund data operations.
Zhao’s predecessor as CEO, Kevin Turner, was a widely respected executive at Microsoft but made his exit from Citadel Securities less than a year after making the transition to finance. Griffin called him a “world-class business builder” when he was hired.
But he was not a world-class statistics expert. He didn’t know the financial industry as well as an insider. And that is what Citadel Securities needed. It took Griffin nine years to settle on the right person to lead his rather unique tech-driven division.
What kind of skills?
While success for fund managers does not necessarily mean training your best quant to take over the firm, Zhao’s example speaks to the skills that funds need to thrive.
Cutting staff and expenses might help firms become more efficient in the short-term, it’s not going to give them a competitive edge that scales like software does. That requires investment in data systems that streamline operations and integrate machine learning.
Hiring someone like Zhao helped attract top-tier statisticians and data scientists throughout the organization. This talent simply has not been interested in working for typical hedge fund executives who can be skeptical of the power of big data. A hallmark of Jim Simons’ success at Renaissance Technologies has been attracting academics who bring a sense of scientific inquiry into finance.
Citadel Securities isn’t the only firm that has figured this out. Look at money manager Neuberger Berman, who hired former New Jersey Institute of Technology professor Michael Recce as its chief data scientist in 2017 to build a new team that uses large, unstructured, novel data to evaluate the health of businesses.
Recce, of all people, understands what hiring means about a company’s health. At conferences and on podcasts he’s talked extensively about scraping hiring and human resources sites for data. It’s a way his team discerns how a company is fairing. He can see whether it’s on the right path.
Aspects of that might be true of Neuberger Berman. When Recce joined Neuberger Berman the data team was just him. Two years later there were nine. More have been brought in since.
That may not seem like many compared to the firm’s more than 500 professionals. But their work signals a major cultural change at the firm, and firms like it, that are growing. Recce and his team have pointed out what’s driving this. It’s not just the opportunity for insights that uncover new investment opportunities. Neuberger Berman’s own investors are calling for access to more data. They want more fund data operations.
Pressure on data ops from LPs
Sovereign wealth funds, pensions, and wealthy families have hired their own data teams to look over Neuberger Berman’s shoulder. To address this Neuberger just launched a high-tech-portal that gives these investors a more direct look at what they’re doing between quarterly investor letters. In other words, Recce is starting to look like a software developer working on the user interface.
Around O’Shaughnessy, Zhao, and Recce, more hedge funds closed than launched in 2019 for the fifth year running. Investors pulled $81.5 billion from funds as of November.
Fund administrator, State Street’s goal of cutting 2,300 jobs highlights how the middle and back-office administrators that serve private funds are laying off and accelerating cost-cutting. Investors in private funds find they can turn their back on fees as returns fail to excite them. Stock traders are starting to be called an endangered species.
But then there’s a formula for a new generation.
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