Fund managers who leave traditional houses to set up hedge funds are increasingly not welcome to return if their venture fails. Russell Reynolds, a leading headhunter, said longonly fund companies were suspicious of the motives of would-be returnees and were turning them down. This is a new factor contributing to a shrinking pool of talented fund managers that has led to rising compensation packages in the UK, according to a report by Russell Reynolds. Average pay for UK investment professionals, including salary, bonus and share options, had risen by 12 per cent over the past two years from £103,000 to £115,500, revealed the report, based on a survey of members of the Chartered Financial Analyst Institute.

The top 10 per cent earn £344,394 on average, up from £282,176 in 2003. However, this was still below the heights reached in 2001, when the average package was £132,018 and the top earners received £440,617. Russell Reynolds said pay rises in the UK were outpacing even the US due to a lack of qualified and talented people and a healthy UK economy. This was despite consolidation such as the merger last year of F&C and Isis, which had led to dozens of investment professionals being laid off. Emmanuelle Arthur- Michels, head of European investment management at Russell Reynolds, said: "About 30-40 per cent of companies on my lists from five years ago have merged. People assume this means a flow of talent to the market and less pressure on wages. "In reality, the pressure for the surviving companies to produce enhanced profits means there is a war for the best people and companies pay handsomely for them." But Ms Arthur-Michels warned that returnees from closed hedge funds were unlikely to benefit.