Hedge Funds Lure Israeli Talent as Money Managers Do the Math

(Bloomberg) -- Israel's small but fast-growing hedge-fund industry is getting a shot in the arm as staff from the nation's investment houses move across in search of higher pay.

Twenty-five funds launched last year as money managers left their old firms and brought clients with them, according to Tzur Management, a Tel Aviv-based firm that tracks the industry. Hedge funds have seen an influx of staff since 2016, when the government capped pay at finance companies such as banks and money managers.

“When they do the math,” money managers quickly recognize the higher earning potential at hedge funds, Tzur Managing Partner Yitz Raab said in an interview. “Then there's also the freedom of running your own fund as opposed to being limited by the internal controls and rules and policies that you may be subject to at a pension fund.”

The movement of people is the latest spur to Israel's hedge-fund sector, which has gained traction over the past decade with the country's rapid economic rise. The emergence of a world-class tech industry, in particular, has created a new class of Israeli millionaires keen to put their money to work.

In 2016, the Israeli government capped pay at certain finance companies at 2.5 million shekels ($690,000), defending the move as a blow against inequality.

Warnings of a brain drain seem to have been borne out. The number of hedge funds in the country increased by a net 10 in 2018 to an all-time high of 150, according to Tzur. The total amount such firms oversee more than doubled in the past four years to $7 billion, the fund administrator's data show. That's still a small fraction of the $3 trillion-plus global hedge-fund market.

The Israeli hedge-fund sector is growing, though, in contrast to the global industry, which has been blighted by outflows. Investors pulled $37.2 billion from hedge funds worldwide in 2018, while more funds closed than opened in the past three years, according to data from eVestment and Eurekahedge.

Read more: ‘Extraordinary' Month Heaps Further Pain on Hedge Funds

Israeli hedge funds actually suffered similar losses to the global industry amid last year's volatile stock markets, both ending the year down about 5 percent, according to Tzur and Hedge Fund Research. Yet investors' desire for a place to put their money helped shield Israel from the exodus of cash suffered by the industry as a whole.

While most Israeli movers opted to start their own funds, existing hedge funds also took the opportunity to swell their ranks, Raab said.

Among the most prominent examples is Noked Capital Ltd., founded in 2013 by former money managers at Psagot Investment House Ltd. Since the pay restrictions were introduced, the Tel Aviv-based hedge fund has added five more Psagot veterans to its management team, and poached several more from insurers and other investment houses. Noked declined to comment.

“This means great things for the hedge-fund industry in Israel, which barely existed a decade ago,” Raab said. “When someone now leaves an institution and they are known and have a strong network, that makes the people in their network take notice.”

--With assistance from Nishant Kumar.

To contact the reporter on this story: Yaacov Benmeleh in Tel Aviv at ybenmeleh@bloomberg.net

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Paul Armstrong

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