Although 2018 hedge fund industry performance was its worst in nearly a decade, the majority of institutional investors surveyed in a recent Prequin report, expect to maintain or increase hedge fund allocations.

 

One might reasonably expect that on the heels of 2018’s collective 3.41 percent loss, institutional investors would turn their attentions elsewhere, and some will. However, a clear majority (79 percent, according to Prequin) has opted to place their bets on hedge funds, and plan to maintain and/or increase their allocations.

 

Isn’t that Counterintuitive?

 

Not really. Consider this oft repeated phrase, “past performance may not be indicative of future results.” When we read this phrase in a prospectus, for example, human nature leads us to assume that the performance of the investment in question may deteriorate. However, is it not equally possible that it will improve?

 

One astonishing example of such improvement is illustrated by Ray Dalio’s Dark Horse Pure Alpha fund, which having returned 1.2 percent in 2017, closed out 2018 with a jaw-dropping 15 percent gain. Past performance was no indication of this happy result!

 

Many of those responsible for allocations, believe that this decade long expansion is rife with bloated asset valuations and flagging economic growth, both of which are being exacerbated by growing protectionism and trade wars.

 

The natural outgrowth of such a pessimistic view is hedge fund investment. Although no one can know with certainty where we are in cyclical economic and market environments, it is no less clear that the environment is undergoing a shift. In such an uncertain climate, institutional investors are turning to hedge funds—not counterintuitive at all!

 

This is why 79 percent of institutional investors polled in Prequin’s report, the largest contingent of investors since 2014, plan to maintain or increase their hedge fund allocations in the coming months.

 

Since the Financial Crisis

 

The hedge fund industry has seen its obituary written multiple times since the financial crisis and, to be sure, the industry as a whole has seen some dark times since 2008. However, hedge funds continue to innovate, explore new strategies, and adopt new technologies. As a result, we are still here; we are still growing; and we remain relevant. Like Mark Twain’s death, the reports of the hedge fund industry’s demise have been highly exaggerated.

 

What about Hedge Fund Jobs?

 

Crypto-currencies, artificial intelligence, machine learning, big data, algorithms, block-chain technology and quants; these are terms that would not be heard in the same breath with hedge funds less than a decade ago. However, it is difficult to find a hedge fund news article today that does not contain at least one of these terms.

 

This speaks volumes to brighter prospects for hedge fund job seekers. Skills, talents and educational backgrounds once far removed from any relevance to a hedge fund firm are now integral to its daily operation.

 

As business cycles ebb and flow, and markets wax and wane, the hedge fund industry will be along for the ride, innovating and adapting as it has since the beginning. Demand for hedge fund jobs will continue to grow, to meet the changing needs of our evolving industry.

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Let’s ensure that we are on the same page before diving into this topic. Reflation, in the context of this article, refers to implementing a government’s fiscal policy and/or a central bank’s monetary policy in a manner that halts or reverses a deflationary trend. A government’s fiscal policy may include, for example, cutting taxes, or making substantial investments in infrastructure projects.

The central bank’s tool kit would include raising/lowering interest rates and, more recently, quantitative easing. Quantitative easing is the large scale purchase of assets, usually bonds, from banks with an eye toward stimulating the economy. Quantitative easing accomplishes this by increasing the money supply, reducing the cost of capital and stimulating investment.

What Is Reflation Supposed to Accomplish?

A reflation policy is intended to alter the trajectory of a deflationary trend in which the prices of goods and services decline. It is important to note that deflation is not synonymous with disinflation, which is defined as a slowing of the rate of inflation.

How Does Reflation Affect Investors?

As stated earlier, reflation may be implemented via the central bank by increasing interest rates. Such increases will cause the price of existing bonds to fall because they will be forced to compete with new bonds issued with higher yields. Many investors will elect to sell older bonds in favor of purchasing new bonds issued with a higher yield. These are actually called reflation trades.

In terms of equities, historical data show that P/E ratios tend to rise as the rate of inflation increases from greater than 1 percent through less than 3 percent. This fact will impact investment decisions for many investors.

What Is the Effect of Reflation for Hedge Funds?

Hedge funds are investors too, and, as such, must be constantly alert to government and central bank policies that impact the markets. This is particularly the case in the era of Trump, as many of the administration’s policies are deflationary in nature, such as tax cuts and the proposed infrastructure expenditures.

One can sympathize with President Trump’s concern regarding the Federal Open Market Committee’s (FOMC) plan for continued interest rate hikes, which, quite literally, would compound the effects on inflation—effects that were already being brought about by the government’s tax cut and administration plans to step up infrastructure spending. Although roundly criticized for interfering with the course FOMC chair Jay (Jerome) Powell had set, President Trump’s concerns were most likely justified.

Allocations are likely to grow as investors recognize the favorable returns occurring in growth assets and analyze risk in terms of opportunity cost.

What about Hedge Fund Jobs?

Hedge funds enjoyed strong gains in January, with a 1.53 percent gain in HFR’s asset weighted composite index. While not as robust a start to the New Year as 2018’s January gain of 2.74 percent, it is a welcome change in comparison to last year’s overall negative performance, which saw the asset weighted composite index close down (-0.84 percent) for the year.

While the job prospects for mid-level hedge fund professionals remain tight, demand for entry level, back office, and other positions are strong.

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What Will Hedge Funds Look Like in 5 Years?

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Both 2018’s hedge fund performance record and Super Bowl LIII results are in the record books. While it is relatively simple to understand the past, the future is exponentially more difficult to grasp. More than three-hundred fund managers and 120 institutional investors participated in a Prequin survey in an attempt to divine the future of […]

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January 7, 2019

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December 10, 2018

Hedge funds, in the aggregate, turned in yet another lackluster performance in November, 2018, which resulted in an HFR weighted composite index of -0.16 percent, which brings year-to-date performance to -2.00 percent—a hard pill for the industry (and its investors) to swallow. Also worth noting, is the fact that as of Friday, December 7, 2018, […]

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