“It’s the type of relationship investors should know about, or simply shouldn’t exist,” Mr. Galvin said.
As the industry has grown in size and stature, hedge funds have become an increasingly important source of revenue for Wall Street banks. Hedge funds, for example, account for an estimated 35 percent of trading commissions, according to Brad Hintz, an analyst at Sanford C. Bernstein & Company.
To distinguish themselves in the highly competitive business, banks — which provide credit and execute transactions for the big investors through their prime brokerage and trading divisions — have built out their suite of services.
Recruiting was a natural extension. Wall Street firms, through their prime brokerage units, are involved in the daily operations of thousands of hedge funds, giving them a good sense of the industry turnover.
After acting as informal recruiters for years, many banks formalized the process in recent years. The Wall Street firms have created rich databases that track hedge fund openings and potential candidates, with a small staff dedicated to the service.
It is appealing for hedge funds. Traditional recruiters take as much as 25 percent of the hire’s first-year compensation. But Wall Street doesn’t charge anything. Richard Scardina, co-founder of the Atlantic Group, a professional search firm, said the banks were his biggest rivals.
“It’s competition, but they are not going to put me out of business,” he said. “We specialize in recruitment day in and day out, and that is an edge that is hard to compete with.”
Mostly, the banks’ staffing efforts focus on back-office and accounting functions, although the banks occasionally place investment professionals and research analysts. Glazer Capital Management, a New York-based hedge fund with roughly $500 million, recently tapped Goldman to hire a staff member in its accounting division, according to a person with knowledge of the matter.
The potential landmines for banks are significant. The majority of people in Goldman’s database are out of work, according to executives at three hedge funds who have used the service. But the list, the people said, does include a small number of hedge fund employees looking to leave their jobs, because they’re unhappy or are looking to move to another part of the world.
In such instances, banks could run the risk of poaching staff from their hedge fund clients, said Dick Del Bello, a senior partner at Conifer Securities, a independent firm that provides administrative support to hedge funds. “The one thing they have to be careful of is, you don’t want to raid the henhouse,” he said. “You don’t want to go to client A and take someone actively there and send them to client B.”
The practice could also have unwanted consequences for hedge funds. If the Wall Street bank knows a top executive wants to leave a firm, the departure could raise red flags about the health of the hedge fund, Mr. Del Bello said. The bank, in response, might decide to withdraw the fund’s credit, potentially forcing it to sell assets.
Ms. Raphael of Goldman said that if the firm discovered something material, it “would discuss the matter and its implications with the client.”
To Mr. Galvin, it comes down to disclosure. “If you are an investor, you want to know the manager is acting in your interest without an ulterior motive.”