Freeze

Hiring of money managers by U.S. institutional investors dropped sharply in the fourth quarter last year as the financial crisis knocked the wind out of capital markets, and investment consultants expect activity to remain tepid at best through at least the first quarter.

"If things have settled down somewhat they may be wiling to make decisions and even take advantage of some of the (market) dislocations," said Bill Dewalt, a senior consultant with Watson Wyatt Investment Consulting in Atlanta, referring to institutional investors such as pension funds. "Many clients recognize there are some extremely attractive opportunities, but remain cautious."

According to money manager consultant Eager, Davis and Holmes LLC, U.S. institutional investors hired fewer money managers in the fourth quarter last year than in the same period a year earlier, but hired more managers over the full year than in all of 2007.

Placement activity in the quarter ended Dec. 31 dropped 29% to 460 from the 652 reported a year earlier. But a rise in placement activity in the first half of 2008 — 1,268, an increase of 20% from the first half of 2007 — lifted the total hiring activity for the year to 2,321, slightly higher than the 2,312 reported in 2007.

While private equity and hedge fund hiring activity went up in the first half of 2008 and contributed to the high placement activity in those quarters, both significantly declined in the second half of the year, said David Holmes, a partner at the Louisville, Ky.-based firm. The firm's numbers are based on publicly reported hiring activity.

Private equity placements were up 22% in the first half of 2008, to 351, compared with the first half of 2007, but dropped 28% to 253 in the second half of the year from the first half. The fourth quarter saw only 98 private equity placements.

There were 84 placements in the first half of 2008 for single-manager hedge funds, compared with eight in the first half of 2007. Placements went down to a total of 37 for the second half of 2008.

In other areas, such as active fixed income, bank loans, high yield bonds, mortgage securities and international equity, hiring remained relatively high or increased in the fourth quarter, Mr. Holmes said.

"Funds are seeking managers with a specialized expertise," he said in a telephone interview.

Active U.S. equity manager hires were slightly higher in the second half of the year, with a total of 193 compared with 176 in the first half of the year. Fourth quarter placements, at 85, were down slightly from a year before, when 99 managers were hired.

"It's interesting that U.S. active equity remained relatively strong in the fourth quarter," Mr. Holmes added. "There's probably some rebalancing going on. But there's also probably some replacing of investment managers that maybe didn't perform up to expectations."

Another area that saw a drop off in hiring activity in the second half of the year was long/short strategies, with eight placements, compared with 18 in the first half of the year.

Terry Dennison, a Los Angeles-based worldwide partner with Mercer LLC, said he was not surprised by the drop in long/short manager hires as several 130/30 managers were formerly long-only managers and didn’t understand the skills required to short.

"It was the flavor of the month," Mr. Dennison said.

Mr. Dennison said the Eager, Davis and Holmes data matched the trends he's seen with third- and fourth-quarter activity dropping off dramatically. What has been interesting, Mr. Dennison said, has been the reaction of clients to the market turmoil. Many are taking their time to consider options, he said.

"Clients have reacted very thoughtfully, without panic," he said. "They're certainly concerned, but the reaction has been more muted and more constructive than what we've seen in smaller (stock market) declines."

Watson Wyatt's Mr. Dewalt said the Eager, Davis and Holmes numbers are also consistent with Watson Wyatt observations, although the Eager, Davis and Holmes numbers are primarily based on public funds while Watson Wyatt's clients are primarily corporate.

"Given all the uncertainty in market, it's no surprise to see a drop in hiring, in general," Mr. Dewalt said, adding that search activity among Watson Wyatt clients fell off in the second half of the year, especially in the fourth quarter. He said first-quarter hiring was above average. Mr. Dewalt said he was not able to provide specific search and hire numbers.

Mr. Dewalt said that while clients are still looking to identify new managers, especially in alternatives, he's warning them about the costs associated with moving assets, especially given the lack of liquidity in the markets.

"We're glad to help them identify a new manager," he said. "But actually deciding to replace one manager with another is very expensive."

Clients are being especially cautious in the alternatives area, including hedge funds, private equity and distressed securities, he said.

"Clients initiating searches (in alternatives) has dropped way off," Mr. Dewalt explained. "Many of our clients have grown cautious about hedge fund investing … There are questions on whether a number of hedge funds will even survive. It's not surprising that people are being cautious in that area."

Search and hire activity will probably not take off until plan officials get a chance to review their year-end reports in the first quarter and decide what to do.