Money talks and managers walk.
A growing number of top portfolio managers are abandoning mutual funds and heading for the greener pastures of hedge funds, lured by the prospect of enormous wealth and the freedom to invest as they like.
"The hedge funds are absolutely going after the best and brightest in the mutual fund industry," says Alex Thomson, a financial services recruiter at Whitehead Mann Group in Boston.
But the mass migration of experience and expertise poses a serious threat to the fund industry at a time when investors depend most on skilled stock pickers to steer them through the volatile stock market.
While mutual fund managers have been jumping ship to hedge funds for years, the pace of defections, as well as the prominence of the managers involved, is on the rise, according to experts.
The proliferation of hedge funds - lightly regulated funds that cater to the wealthy and institutional investors - and recent market conditions are primarily to blame.
"The guys that are going to the hedge funds see a tremendous amount of opportunity in today's choppy market and want to take advantage of it," says Mr. Thomson.
Last week, Simon Wolf, who managed Fidelity Investment's $53.6 million Fidelity Select Business Services and Outsourcing Portfolio, quit the Boston fund titan and headed for Pequot Capital Management, a hedge fund in Westport, Conn.
Mr. Wolf's departure comes weeks after David Felman, one of Fidelity's best-performing fund managers in recent years, left to join New York hedge fund Andor Capital Management. Mr. Felman was head of Fidelity's $7.1 billion Mid Cap Stock Fund.
And in February 2000, Erin Sullivan, who attained spectacular triple-digit returns as head of the Fidelity Aggressive Growth Fund, quit to start her own hedge fund.
Fidelity is not the only company hit hard by defections to hedge funds.
Last month, Brian Stack, who managed about $5 billion in mutual fund and institutional assets for crosstown rival MFS Investment Management, quit to launch his own hedge fund.
Rudy Kluiber, former manager of State Street Research and Management's Aurora Fund in Boston, defected to the world of hedge funds three months earlier.
And it's no wonder. Hedge funds, which are theoretically designed to minimize losses when the stock market is faltering, hold one big carrot: moolah, and lots of it.
Unlike mutual fund managers, who are paid a salary and a bonus, those running hedge funds collect 1% of assets and 20% of profits. Thus, a hedge fund manager who expands a $500 million fund by a conservative 10% over one year stands to earn a cool $15.5 million.
going for bucks
Meanwhile, the median paycheck for a stock fund manager is paltry in comparison. This year's is expected to be $436,500, according to a recent study by executive search firm Russell Reynolds Associates in New York and the Association for Investment Management and Research in Charlottesville, Va.
But money is just one of the attractions. Freedom to invest is the other.
Like kids to ice cream, some mutual fund managers are drawn to the hedge fund industry's fast-moving, go-anywhere style of investing.
Charged only with making money in any market environment, hedge funds can short as well as buy stocks. They can also borrow money to bolster their investing power and make highly concentrated bets on a single stock.
Mutual fund managers, meanwhile, are typically limited to buying and selling stocks - and usually only stocks that fall within a certain market capitalization or a specific sector or investment style.
"You have a lot more tools at your disposal at a hedge fund," says Timothy Keefe, who resigned a year ago as a top portfolio manager at John Hancock Funds in Boston to join a startup hedge fund owned by Thomas Weisel Partners, a San Francisco private-equity firm.
"You are able to make more-aggressive calls on your longs, and you're able to take out market risks by using your short positions."
There's also the freedom that comes with no longer being tied to a big mutual fund company - or, more specifically, to the gather-assets-at-all-costs mentality prevalent at many fund companies.
"The driving force won't be sheer asset size," former MFS manager Mr. Stack says of the hedge fund he intends to launch in the fall.
"A hedge fund product can be very functional at $250 million to $500 million, whereas a mutual fund product is barely profitable at that point."
Given the economics, it's no surprise that mutual fund managers are defecting to hedge funds in droves.
Two months before Mr. Stack announced his decision to leave MFS, Thomas Barrett quit as co-manager of the MFS Massachusetts Investors Growth Stock, a large-cap growth fund with $17.3 billion in assets.
Two years ago, two other high-profile managers at MFS - John Brennan and Chris Felipe - quit to launch their own hedge fund, Sirios Capital Management.
Earlier this year, Greg Fraser, manager of $6.5 billion Fidelity Diversified International, and Tim Krochuk, manager of Fidelity's $62.4 million TechnoQuant Growth and $635 million Small Cap Selector, also hit the door.
The two, along with Mr. Kluiber from State Street Research, are apparently planning to open their own hedge fund, according to Morningstar Inc. in Chicago.
The big question, of course, is whether the job-hoppers will be successful.
By nature, hedge funds are riskier and more volatile than mutual funds. And hedge fund investors are known for having an extremely low tolerance for bad performance.
"Running a hedge fund is a lot more difficult than many people realize," says Thomas O'Neill, a managing director at Navigator Management Company LP, a Boston hedge fund firm with more than $500 million in assets.
Take Ms. Sullivan, the former Fidelity star.
While her fund climbed 7.5% during the first five months of the year, it dropped 19.6% during the last six months of 2000, according to an investor in the fund that spoke on the condition of anonymity.
"Erin's had a rough go of it," the investor says. "But we're not throwing in the towel on her - at least not yet."
Ms. Sullivan failed to return calls to her firm, Spheric Capital Management in Boston.
With managers jumping ship in droves, the fund companies are, predictably, fighting back.
Last week, OppenheimerFunds Inc. of New York agreed to shell out $140 million to buy Tremont Advisers Inc., a hedge fund-of-funds business in Rye, N.Y.