A non-compete agreement, also known as a covenant not to compete, originated in the employment relationships of tech companies. It's a system that restricts employees with access to core trade secrets from engaging in certain activities during their employment and for a defined period after leaving.
Such agreements are common in the internet and high-tech sectors, primarily used to bind key technical personnel.
Non-Competes in the Quant World
Quantitative trading in finance is, by nature, a technology-intensive industry. The trading strategies developed by quantitative researchers through factor mining and mathematical modeling are the core intellectual property of quant investment firms. Therefore, personnel holding these "secrets" are required to sign non-compete agreements.
What Do Non-Competes Restrict?
Time Restrictions
Domestically, the maximum term for a non-compete is 3 years, with 1-2 years being more common. Based on our understanding, most domestic quant firms set the restricted period for 1 year. Given the rapid pace of markets and strategy evolution, overly long restrictions are often impractical.
Internationally, restrictions can be very stringent. Citadel is known for having one of the strictest policies; almost all departing employees are subject to a 15-18 month non-compete.
Scope Restrictions
If a core strategy team member joins a competitor and leaks confidential information, it can be devastating for the original firm. Therefore, non-competes typically restrict leavers from engaging in work substantially similar to their previous role during the restricted period.
Compensation
Typically, individuals adhering to a non-compete are entitled to compensation. In China, the compensation is commonly 30% of the average monthly salary from the last 12 months, which is also the legal minimum.
Specific local regulations also vary:
Beijing: Article 39 of the Beijing High Court's Seminar Minutes on Legal Application in Labor Dispute Cases stipulates that compensation can be set at 20% - 60% of the employee's average monthly salary from the final year of employment.
Shanghai: Article 13 of the Shanghai High Court's Opinions on Several Issues in Applying the Labor Contract Law generally sets compensation at 20% - 50% of the employee's average monthly salary during employment.
Shenzhen: Article 24 of the Shenzhen Special Economic Zone Regulations on Protection of Corporate Technical Secrets mandates that monthly compensation must not be less than 50% of the employee's average monthly salary from the last 12 months.
Of course, cities like Jiangsu, Zhejiang, Zhuhai, and Ningbo have their own standards, which we won't list exhaustively here. What do these legal clauses mean in practice?
An Example
Assume: Average monthly salary: 50,000 RMB (using 30% compensation rate)
Calculation:
Monthly compensation: 50,000 * 30% = 15,000 RMB
Payment method: Monthly, until the agreement term ends. Note: There's a catch here!
The key factor isn't just the percentage, but the calculation base. As mentioned, the base is the "average salary of the last 12 months". Calculating this based on monthly base salary versus *annual total compensation / 12* yields vastly different results.
Another Example
Assume compensation: Monthly base 50k RMB, bonus 400k RMB, total annual = 1,000,000 RMB (using 30% rate)
Monthly compensation calculation:
Based on base salary: 50,000 * 30% = 15,000 RMB
Based on annual total: (1,000,000 / 12) * 30% ≈ 25,000 RMB
See the difference? When signing a non-compete, carefully scrutinize the calculation base!
"Loopholes" in Non-Compete Clauses
Non-competes often specify a geographic scope, but laws also state that this scope cannot be arbitrarily broad. In principle, the restricted region should be limited to areas where the former employer faces actual competition. We've seen domestic quant funds primarily restrict to Mainland China, sometimes including Hong Kong, Macau, and Taiwan. Consequently, taking a similar role outside this specified geographic area typically does not violate the agreement.
An extreme example: Europe is far from Asia, and US legal jurisdiction doesn't extend to China. So, a quant returning from the US to start a firm or join a team in China generally doesn't need to worry about their previous US non-compete.
The "Scope of Work" Loophole
This parallels the previous point. For a quant returning from overseas, their research focus naturally shifts from, say, US equities to A-shares. If the new research scope falls outside the specific activities restricted by the agreement, it's generally not considered a violation (always check the exact wording of your specific agreement).
Furthermore, joining a diversified conglomerate that includes a quant arm might not violate the agreement, provided your employment is demonstrably not with, or subordinate to, that specific quant division within the conglomerate.
The "Dispatch System" Loophole
The protagonist in a notable 2023 billion-yuan private fund non-compete dispute utilized a "dispatch system" for social security payments. Setting up affiliated entities is common; most quant firms have them. A more sophisticated move involves mainland quant firms establishing affiliated companies in Hong Kong. Changing the legal entity, primary business scope, and jurisdiction – that's often the safest bet.
"Enforcement" Loophole
Strictly speaking, this isn't a loophole but a legal stipulation: if the agreed compensation is not paid on time, the non-compete agreement becomes void. Given the often stringent terms in domestic quant fund non-competes, which aren't always well-received by employees, delayed payments are not uncommon. If your compensation is withheld, you have grounds to challenge the agreement's enforceability.
This is by no means an encouragement to evade your obligations. If the compensation is fair and paid promptly, it's generally not worth the legal hassle to challenge it. We should acknowledge the role of non-competes: protecting trade secrets and intellectual property, stabilizing the market, and maintaining fair competition. However, we must also recognize the existing controversies. For instance, compensation can be pitifully low in China, especially if base salaries are modest and promised bonuses aren't documented in the contract, leaving departing employees at a significant disadvantage.
A dialectical view is best, seeking an optimal balance. Ultimately, understanding and respecting the relevant laws, and striving for a reasonable solution through negotiation, is the most prudent path.
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