Wall Street may not exactly be on a roll, but at least it's beginning to rumble.

In 2010, asset management firms began preparing for post-recession competition by selectively hiring and slightly increasing compensation, and in 2011, they are expected to once again actively seek out-and compensate-alpha-generating portfolio managers, according to executive search firm Russell Reynolds.

"After two years of contraction, hiring in the asset and wealth management industry rebounded in 2010, and compensation is set to show modest gains," said Lynn Tidd, a managing director in the hedge fund practice at Russell Reynolds. "For the asset and wealth management industry as a whole, certain functions are starting to see upward pressure to attract key personnel."

Indeed, an ADP Employer Services report on Wednesday showed that private employers added 297,000 jobs in December, triple economists' median estimate and a big gain from the 92,000 new hires in November. The labor backdrop is finally beginning to show improvement, experts are saying.

Total compensation at retail asset management firms rose 10% to 15% in 2010, with the biggest winners executives in fixed income and emerging markets, managers of the handful of funds that outperformed their benchmarks, and back-office employees earning less than $150,000, Russell Reynolds said.

Pay packages for superior international and emerging market equity managers could rise 20% or more in 2010, as both a reward for their performance and as a retention measure, since emerging markets are expected to continue to deliver strong gains in 2011.

Compensation for long-only domestic equity managers, on the other hand, will either be flat or slightly down in 2010. It will be a long time before this group of talent is paid at 2007 record highs, Russell Reynolds said.

For fixed income, 2010 compensation is likely to be flat to slightly up, but firms might pay junior and middle-office support personnel slightly more, again as a retention measure.

Although technology and operations investments at the largest firms remained static in 2010, independent and boutique firms increased their spending. Thus, compensation for IT professionals at these shops could rise 15% to 20%.

At hedge funds, the majority of managers produced flat to only slightly positive returns in 2010, Russell Reynolds said. Thus, 2010 bonus pools may stay at 2009 levels. Only hedge fund marketers and salespeople, a new area in high demand, are likely to see continued increases in their compensation and hiring in 2010 and into 2011. In fact, hedge funds with $10 billion or more in assets have begun forming sales divisions similar to traditional asset managers, with a six- to 20-person sales team segmented by region, product or category.

Besides international and emerging markets, the retail funds that attracted the most money-and talent-in 2010 were firms distinguished by their "integrity, transparency and simplicity," Russell Reynolds said.

For 2010, "boring was the new brilliant," concurred Debra Brown, a managing director in the asset and wealth management practice at Russell Reynolds.

Although few retail asset management firms expanded their headcount, in terms of specific job functions, the greatest demand in 2010 was for leadership talent that could deliver top-line growth. Asset management firms were in the market for:

* CEOs with investment backgrounds, proven leadership and technical skills. In many cases, CEO talent was imported from other areas of the financial services industry, such as investment banking, capital markets and the securities business.

* Chief investment officers. In addition to searches at retail asset management firms, the demand for CIOs was at peak levels at university endowments, pension plans, family offices and sovereign wealth funds.

* Proactive CFOs, controllers, tax and audit executives who can work with senior management.

* Senior distribution executives with longstanding client relationships and deep product expertise.

* Technology and operations professionals.

* Risk managers and regulation and compliance professionals to advise on current rules and help predict future legislation.

* Global, international and emerging portfolio managers.

* Investment teams from proprietary emerging market and high-yield desks at investment banks and boutiques.

* Opportunistic hiring of wholesalers displaced from the earlier downturn of 2008-09.

Looking into 2011, with flows recently returning to stock mutual funds and hedge funds, the outlook for alpha-generating shops and professionals is strong.

Most hedge funds have already begun expanding their talent. In particular, 2010 was a good year for credit and event-driven hedge funds due to the high level of bankruptcies, restructuring and mergers and acquisitions.

Some hedge fund founders are also beginning to think about succession planning and are looking for the next generation to run their firms.

"Given that many believe the current low interest rate environment will be prolonged and accompanied by a gradually improving macro credit picture, it was not surprising that the growth and interest in credit shops continued to increase throughout the year, and demand for credit talent-analysts, portfolio managers and sales professionals-remained strong." Russell Reynolds said, in a new report titled, "Navigating the New Terrain in the Asset and Wealth Management Industry."

"If 2009 was the 'road to recovery,' 2010 marked the 'return of cautious optimism," Tidd said. "Assets began flowing back into hedge funds, slowly at first and then more steadily towards year-end."

In 2011, investors should continue "coming out of their bunkers," Tidd continued. "With interest rates near zero and high volatility in the equity markets, alpha-seeking investors once again are turning to alternative investment strategies for attractive, risk-adjusted returns-and hiring will actively follow suit."

"The threats that buffeted global financial markets in early 2010 have been followed by a sharp rally in financial assets as we head into the year end," said Russell Reynolds "Investment flows have been redirected into higher-alpha, higher-margin asset classes," the report said.

"The 'risk-on trade' is coming back," it said.

However, because profitability isn't likely to return to pre-downturn levels anytime soon and the industry continues to consolidate, with the top 20 firms capturing almost 90% of new asset flows, "leadership must have the courage to divert resources to areas of double-digit growth and away from stagnant or low-growth strategies."

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