Hedge Fund DE Shaw Implements Loyalty Pledge Into Its Employment Provision

Published / by TheRugbyUnion

The timing of DE Shaw’s decision to implement a non-compete agreement stipulation with his hedge fund employees has raised speculation. The implementation date, September 16, 2019, coincides with the date a former managing director, Daniel Michalow, is free to hire employees away from the firm. Prior to that, Michalow’s employment contract bound him to 18-month restrictions on interference clause. Because the firm fired Michalow for alleged sexual misconduct, DE Shaw should have no reason to fear an exodus to join Michalow’s new endeavors.

The DE Shaw firm is known for guarding the inner workings of its hedge fund management. The fund’s manager, David Shaw, rarely allows outsiders access to internal correspondence or shares the firm’s managerial agenda. When the firm chose to accuse Michalow of misconduct, which led the ousted managing director to fight back, the proceedings changed that. Michalow’s challenge forced the firm to reveal some of its information. The revelations caused the industry to wonder why the firm went to such lengths to hide normal hedge fund activity.

The DE Shaw firm is notably successful. David Shaw’s firm manages more than $50 billion using computer algorithms to determine trades and is one of the largest in the nation to do so. Shaw claims that his implementing the non-compete agreement rule is in line with common industry practice and that the decision is not tied to Michalow.

Should an employee decide not to sign the agreement, DE Shaw has indicated that the firm will terminate that employee. However, the firm plans to allow terminated employees to keep the deferred compensation typically forfeited. Those who watch the investment firm industry consider the possibility that this tactic may drive employees out. Additionally, signing the agreement prevents fund managers from leaving DE Shaw to work for another firm, ultimately locking them into Shaw’s employ. Those who do not sign are free to join other firms, form fund management partnerships or open their own hedge fund operations.