n+1: Let’s do HFM’s principles of hiring people. What are the difficulties of hiring people?
HFM: The main difficulty of hiring people in the hedge fund world is that if you’re hiring somebody for a junior role, if they’re any good, they’ll want to advance. But we’re not running a pyramid scheme: not everybody can be a partner in a hedge fund, not everybody can advance. So if people are good, you risk losing them to another fund. That’s a huge problem because they leave having been educated by you. They leave with a lot of your secrets. If you want to run a group in a way that’s collaborative and open, that’s one of your problems.
n+1: How can you tell if they’re good? I think to go through an interview would seem, anyone could do . . .
HFM: That’s why it’s hard. It’s hard to spot that. There’s no test you can give. For specific roles there are. If you’re looking for a financial analyst you can give them a case and say, “Here are the financials of the company. Take a look.” You can ask them questions and see if they get the joke. “If you were analyzing this company, what questions would you have?” See if they come up with the right kinds of questions. You can test that, and you can get a good sense of overall intelligence–there are brain teaser questions, consulting interview questions you can give people to see if they’re good at estimating, are they good at logic puzzles, that kind of stuff, because you do need to have logical thinking and you do need to be good at doing estimations. You have a limited amount of data; try to reason your way to a result with incomplete information. But what you can’t really test is good judgment, like overall good judgment, and that’s what’s making investment decisions is about. But usually you’re not hiring people that you’re going to simply say, “Here’s a book, trade this book.” Usually you’re hiring people at a more junior level and those kinds of analytical abilities, you can test.
The problem is that many of the people who have those analytical abilities also do turn out to have good investment judgment and their ultimate goal is to exercise investment judgment. That’s the problem. How do you prevent more junior, ambitious people from walking away with your intellectual assets? One of the problems that I’ve often observed in hiring is that the recruiting function of the organization often views success as getting you the top guys: “This is the top guy from the computational finance program at Carnegie Mellon, and this guy’s the summa cum laude from Yale.” To hire that guy as an analyst, that’s how they view success. “I got you the best guy!” But that’s wrong! You want to hire for the role. If you only hire people who have always dreamed of being in a hedge fund and who really want to be a portfolio manager really young, within six months of being an analyst they’re saying, “Okay, when can I be a portfolio manager?” And eventually if they’re good they’ll leave.
n+1: Let’s say you’ve defined a role, you’re hiring for the role, and you have four people who are going to be happy with that role and they seem like they’re all qualified to play that role.
HFM: The tallest.
n+1: Have you developed principles…
HFM: They’d have to fit in. You have them interview with everybody in the group, and you do certainly get an intuition for people’s personalities. Is this a person who works well with others? In our organization, we work very collegially, it’s not hyper-competitive internally. There are downsides to that, right? Sometimes a very hyper-competitive internal environment, you just get a lot more out of people, but it’s also in some ways very unpleasant, and a lot of what you can get out of people tends to be wasted on politics. So we chose to go the way of trying to build business processes that rely on collaboration and that work when there’s collaboration, so we need people who seem to get along with other people. I don’t need to hire the hardest charging guy, or gal, all the time.
HFM: So sometimes in making decisions, “He’s a little bit more relaxed.” He, somebody, of the four, is not always the highest energy person.
n+1: Have you made mistakes in hiring?
HFM: Sure, sure.
n+1: How did you know they were mistakes?
HFM: When you find you’re spending a lot of time and sustaining a lot of brain damage managing them, that it’s just a constant fight to manage them. They’re not comfortable with the role that they’re in, they’re really itching to get into a different role, or they don’t brook supervision well. They really just like to work independently and don’t like to have to answer to other people. That’s an issue.
There are lots of people, who, it turns out, conversely, they’re just not that interested. They like the idea of working at a hedge fund, but in reality the work doesn’t interest them that much and they just . . . it’s difficult to do this work well unless you’re really interested. Particularly the way we do it because a lot of the work is somewhat tedious.
n+1: Were you surprised? Were you like, “I can’t believe this person, throughout the whole process of interviewing, seemed like such a person A and now they turn into person B”?
HFM: Sure, sure! Look, the interview process is short, relative to how long you’re going to have to live with these people, right? And almost anybody with any amount of self-control can portray themselves as someone completely different through the space of five or six interviews. But, not everybody’s such a sociopath and is willing to do that just for a job.
I think the biggest thing is, if you’ve made a mistake hiring someone, you’ve got to admit it to yourself and just deal with it, sooner rather than later. There’s a tendency—and I’m more guilty of this than my other partners—of wanting to avoid conflict, or not wanting to deliver people bad news. And you go, “I can figure out a way to make this work, I can define the role a little differently, I can manage this person a little differently, I can spend a little bit more time soothing ruffled feathers. And try and make it work.” But in reality, if it doesn’t work, you’ve got to recognize that quickly.
n+1: How quickly?
HFM: There was one partner here who was great at that. This partner, there are people, they were here and two weeks later they weren’t.
n+1: Can you tell in two weeks?
HFM: I can’t. It takes me months to know. But then I’m patient. And it’s hard for people to fit into our organization. “Let’s see,” you know, “they’re working their way toward equilibrium.” When you get to equilibrium and the equilibrium doesn’t work, then you pull the trigger. It’s funny, I hate doing performance reviews, it’s one of the things I loathe, particularly for people who’ve been here a long time, because what tends to happen is you say, “These are the things you do well, and these are the things you need to change.” Then you come back in six months to the next performance review, and the things they do well, they still do well, and the list of things they don’t do well has gone down by one or two. Then the next review, it’s gone down one or two. Eventually, it approaches their personality. And what you’re doing is a personality review, not a performance review. Because everything they could change, they’ve changed! So why am I doing a personality review every six months?!
n+1: But it’s okay . . .
HFM: Yeah, some of those things you’re willing to live with. We all have things that are annoying, right? The worst is doing performan
ce reviews for people I really like, because it’s like, “I have to tell you things about your personality or about your work habits that I think are, um, sub-optimal, but I think you’re a great worker anyway and I like working with you anyway.” But I have to tell you some annoying news about the things that if you’re reflective at all, you know that you do wrong, right? And you’re probably disgusted with yourself that you can’t change.