If you’re an employment law wonk, the big news this week is that the Federal Trade Commission has decided to ban the use of non-compete agreements. In doing so, it says it will increase worker earnings by more than $488bn over the next decade. The ban won’t affect existing agreements signed by “senior executives”, but no new non-competes are to be allowed, and any currently outstanding non-competes with employees earning less than $150k are null and void. Unsurprisingly, employers are not pleased; lawsuits have already been filed challenging their power to do this.
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Banks and hedge funds are famously partial to non-competes, so it might be supposed that this would all create a problem for them. In fact, for banks it all means a lot less than you’d think. For one thing, most banks and insurance companies aren’t subject to FTC regulation – they might have dozens of other regulators to comply with, but this isn’t one. And the existence of a federal ban might make it a lot less likely that states like New York will bother passing their own legislation.
Hedge funds are a different matter. In principle, hedge fund employees will be covered by the ban. And the FTC rule (check page 81) makes it clear that they won’t allow the use of NDAs, non-solicitation agreements or no-hire agreements to create a non-compete by the back door. So in principle, it might have got somewhat more difficult for aggressive hedge fund employers to intimidate portfolio managers who want to start up their own fund or pod elsewhere.
But, in the hard-nosed and often extremely destructive world of employment litigation, “in principle” are two words that you should be very scared of. In its letter arguing against the ban, the securities trade industry SIFMA pointed out that it would most likely “produce needless litigation to protect sensitive information through the use of inferior alternative methods like trade secrets law”.
For example, Jane Street is quite famous for not using non-compete agreements, but it’s still sueing Millennium over the hiring of two traders. Citadel Securities does use non-competes, but it also claims exclusive intellectual property over any ideas you might have while you’re working there. Basically, if someone is sufficiently angry over your job move, and they have a lot of money, there are dozens of ways they can make your life miserable.
And the ban on non-competes might even make things worse for hedge fund employees. Last year, Izzy Englander of Millennium said the prevalence of non-competes was reducing the talent pool available for pod shops to recruit from. Because they couldn’t poach employees in the normal manner (like banks), hedge funds had to pay “silly money” for the limited talented available, or raid the sell side, Englander said.
This is really just another way in which finance isn’t like other industries. It’s a close-knit community where personal relationships matter; that means that employee moves are often crucial to business success, but it also means that what goes around comes around, so in most cases people don’t want to rely on the law to keep hold of people. Non-compete arrangements are hardly ever a good way of keeping valuable employees, compared to good old-fashioned deferred compensation.
Elsewhere, the consultancy industry appears to have the opposite problem to multi-strat hedge funds – nobody’s leaving. And that means that consulting firms are having to become increasingly blunt in telling underperforming staff that it’s up or out, and up isn’t an option.
Consultancy is also a tight-knit world of personal relationships, and so they don’t like to have compulsory redundancies. As the global chair of BCG puts it, the “emotional reality” of actually firing people is very different from managing headcount by voluntary attrition. It’s a lot easier to put up a PowerPoint recommending ten thousand layoffs of people you will never meet, than to process the firing of one of your close friends.
And yet, it can’t be great for morale to see dozens of people “on the beach” without assignments. The big professional services staffed-up considerably during the recent boom, paying as much as $235k for MBAs in the process. When the partners consider how much of that money is coming out of their own pockets, they might decide that they can’t afford to be nice anymore.
Meanwhile…
What is the exact slope of the diagonal in the Deutsche Bank logo? Fifty three degrees! What was it originally called? “The Signpost”. Many more fascinating facts about banking’s most famous box with a line in it, which celebrates its fiftieth birthday tomorrow. (Deutsche Bank)
An oral partnership agreement isn’t worth the paper it’s written on, the Delaware Court of Chancery has ruled. That’s a blow to David Handler, as it means he was never a partner at Centerview and can’t demand access to its books in his ongoing lawsuit against them. (FT)
Since the range of tasks that AI can do is growing, that means that the “captcha” tests used to prove you’re a human being are getting harder. (WSJ)
“AngryGF” is a chatbot that simulates a virtual girlfriend who is angry with you, in order to teach men better communication skills. “AngryClient” could definitely be appearing on an analyst training program somewhere soon. (WIRED)
SKYY Partners has raised $120m and invested $80m of it in a maker of truffle infused hot sauce. It turns out that having Kim Kardashian as a GP isn’t as good a selling proposition as you’d think – people ask the obvious question “if she’s adding value to the brands you invest in, how do you sell?”. There’s also apparently an issue with investors who are “old enough to remember the Elevation Partners/Bono fiasco” (Axios)
A good, if slightly technical, deep dive into Bridgewater’s “risk parity” formula, and the reasons why it doesn’t seem to have been delivering the goods for a while. As one competitor puts it, “Diversification’s nemesis is FOMO – by definition you’re always going to have some regret”. (Bloomberg)
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