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 within their stories as stats scientist + strong leadership + cultural change management + data operations = recruiting people. Most business leaders would agree that hiring and people placement are two of the most critical facets in controlling results-based outcomes. These three examples would likely 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 firm founded by hedge fund leader Kenneth Griffin. 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 with a small team, and it’s hard to state whether they are hiring. But they look like moving in the right direction. Citadel Securities, not to be confused with Griffin’s hedge fund Citadel LLC, is clearly hiring and growing. Neuberger Berman, which includes a major hedge fund business, increased headcount by six per cent in 2018. They have continued to employ when the others in its industry are shrinking.
In the case of each, they figured out just how to identify leaders trained in statistical principles. They found ways to evolve their organization to take into account their work not as a collection of tasks, but as managing clouds of data. These three matched that with data and pc software infrastructure which could keep up with the task. Each launched new services and initiatives that are profitable and people are able to pay for. That leads to hiring.
Start with the head of $5.7 billion quantitative asset manager OSAM, Patrick O’Shaughnessy, and their pc software product called Canvas. It’s designed to help investors develop customized investment portfolios.
O’Shaughnessy is different from Zhao and Reece for the reason that he won’t have a statistics education. But he represents the kind of people, like Zhao’s boss – Ken Griffin at Citadel, who recognize that data is the core of their business and they need to find the people like Zhao and Recce to organize what the firm does increasingly around the data to produce that data easier to use.
O’Shaughnessy explained the genius of having a software product to better comprehend 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 pc 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 businesses discovered they couldn’t make enough money to justify the costly infrastructure and talent to produce their organizations work.
Five years later cloud computing infrastructure was built that has managed to get cheaper to check and prove businesses that use massive amounts of data. Now the power of big data operations is changing how we think of businesses and fund data operations.
In the hedge fund world, that wave of change has become 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 more substantial scale for even bigger fund titans.
Citadel Securities announced a new office in Austin, Texas this past December. Over the summer the firm embarked on a Silicon Valley hiring bonanza. That’s not forgetting Citadel Securities’ reported $3.5 billion in revenue last year, and its particular claim to own handled one in five shares traded in the U.S.
Many on Wall Street are asking what’s driving Citadel’s success. Those looking to Griffin for the answers could 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 truly a relatively unsung quant at Citadel to an executive. Now he’s making waves, driving more direct public listings as an example. 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 essential if less visible, lesson to remove from Zhao’s success atop the computerized trading firm. Gaining a competitive edge in 2020 requires a person who understands what size data culture works in the financial sector culture. Actually cultural acceptance is one of the most deceptively key elements for data operations to soak in to 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 annually after making the transition to finance. Griffin called him a “world-class business builder” when that he was hired.
But he was not a world-class statistics expert. He didn’t know the financial industry along with an insider. And that’s what Citadel Securities needed. It took Griffin nine years to stay on the right person to lead his rather unique tech-driven division.
What kind of skills?
While success for fund managers does not indicate training your very best quant to take over the firm, Zhao’s example speaks to the skills that funds have to thrive.
Cutting staff and expenses might help firms become more efficient in the short-term, it’s not planning to give them a competitive edge that scales like pc 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 boffins throughout the organization. This talent simply has not been thinking about working for typical hedge fund executives who are able to be skeptical of the power of big data. A hallmark of Jim Simons’ success at Renaissance Technologies has been attracting academics who bring a feeling of scientific inquiry in to 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 fresh team that uses large, unstructured, novel data to judge the health of organizations.
Recce, of everyone, understands what hiring means about a company’s health. At conferences and on podcasts he’s talked extensively about scraping hiring and recruiting sites for data. It’s a way his team discerns how a company is fairing. He is able to see whether it’s on the right path.
Aspects of that could be true of Neuberger Berman. When Recce joined Neuberger Berman the data team was just him. Two years later there were nine. More have now been brought in since.
That may not look like many when compared with the firm’s more than 500 professionals. But their work signals a significant cultural change at the firm, and firms want it, that are growing. Recce and his team have described what’s driving this. It’s not just the opportunity for insights that unearth 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 very own data teams to look over Neuberger Berman’s shoulder. To address this Neuberger just launched a high-tech-portal that provides these investors a more direct look at what they’re doing between quarterly investor letters. In other words, Recce is starting to appear to be a computer software developer taking care of the graphical 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 could turn their back on fees as returns neglect to excite them. Stock traders are getting to be called an put at risk species.
But then there’s a formula for a new generation.