The suggestion that assets under management are soaring is admittedly a bit Trumpian, but the fact is that the number of hedge funds shrank to 9,803 (including funds of funds) while 2016 industry assets under management climbed to just over $3 trillion according to the HFR Market Microstructure Report.

What Can Be Inferred From the Report?

If the number of hedge funds is shrinking at the same time hedge fund assets under management (AUM) rise, then it stands to reason that those firms remaining are becoming larger. More dollars spread among fewer firms can result in no other outcome.

In January 2017, hedge fund redemption slowed to $5.2 billion, a figure that represents about one-quarter of the outflows suffered in January 2016. Suffered may not be the correct adjective because we must also infer that many of these redeemed funds are being redirected to hedge funds with superior performance metrics. Otherwise, how is the growth of AUM to be rationalized?

How Will This Affect Hedge Fund Compensation?

For insights into the effect of larger firms on hedge fund compensation, we look to the 2017 Hedge Fund Compensation Report.

2016 HF Comp by Firm Size

 As the chart shows, mean compensation begins to trend lower in larger firms, those with fifty or more employees. One can expect investors to redeem from firms that have failed to meet expectations and invest in higher performing firms. However, that does not mean that these investment dollars will necessarily flow to the largest firms. Countless hedge fund firms, with fewer than fifty employees, boast stellar performance records. As a result, they will attract their share of investors.

Nonetheless, as underperformers shutter and the total number of hedge fund firms continues to decrease, the growth of even the smallest firms is all but guaranteed. If the trend toward lower compensation in larger firms, as shown in the chart above, were to continue, then it would be reasonable to speculate that hedge fund compensation overall will undergo a decline.

There are too many factors in play which could impact the industry, therefore it would be irrational to predict this outcome since we know the paradigm in which the above chart exists may be radically different from tomorrow’s.

What Is the Impact on Jobs?

We all understand that swings in assets under management do not necessarily mandate adjustments in staffing, but those who lose their positions because of firm closure could face increased challenges in their quest to gain purchase with another firm.

Bookmark and Share

{ 0 comments }

After an inglorious 2016, many pundits jawbone about a continued investor exodus from the so-called overpriced and underperforming hedge fund industry. However, the facts are in stark contrast to the rhetoric. January 2017 redemptions total $5.2 billion, about one-quarter of the $19.3 billion outflow the hedge fund industry experienced in January 2016. Furthermore, a substantial percentage of the monies redeemed were reinvested in hedge funds with superior performance records. We know this to be true, because year over year hedge fund AUM continues to rise, and presently stands at $3.018 trillion.

Painting the hedge fund industry as being in a death spiral is like saying the sun will burn out in 5 billion years. Undeniably, a number of hedge funds are underperforming—a small number will fail, but this has always been so.

Credit Suisse Delivers Positive News

In its ninth annual Hedge Fund Investors Survey, 87 percent of 320 institutional investors representing $1.3 trillion in hedge fund investments, indicated they would maintain or increase their hedge fund exposure in 2017…this is the same percentage reported in Credit Suisse’s 2016 survey.

Some of this willingness to stay the course may be attributed to the fact that 57 percent of these investors reported receiving fee reductions in the past twelve months. Additionally, 61 percent of the survey’s respondents reported having at least one manager in their portfolio with a hurdle rate. This confirms a trend between investors and hedge fund managers in which they continue to achieve a better alignment of terms.

What Drives Redemption?

As one might expect, the main driver of redemption, according to 80 percent of survey participants, is underperformance. Fifty-two percent of respondents cited strategy drift and individual investment manager turnover as drivers.

Interestingly, just 30 percent of the survey’s respondents felt that their hedge fund met or exceeded expectations, a 15 percentage point reduction from last year’s 45 percent. This is worrisome. Either expectations are elevated or hedge funds are performing more poorly. The aggregate gains for hedge funds in 2016 as compared to 2015 would suggest the former, not the latter.

What Are Investors Looking for In a Hedge Fund?

Investors surveyed are looking for returns net of fees, non-correlation with existing investments and core team stability coupled with proven risk management skills, in that order.

The Forecast Is Growth

While the Credit Suisse survey is replete with insights, the most heartening takeaway is investors predict a 3.5% increase in inflows during 2017. If this materializes, we will see hedge fund AUM rise by around $106 billion at year-end.

Hedge Fund Jobs

The Credit Suisse survey is great news for those seeking employment in the hedge fund industry. Growth will certainly enhance demand. The survey indicates that the most sought after hedge fund strategies are Global Macro-Discretionary, with 26 percent of those surveyed indicating a preference for this strategy, followed by 18 percent opting for Fixed Income Arbitrage/Relative Value and another 18 percent favoring an Emerging Markets-Equity strategy. It follows that employment opportunities will be greater in firms following one of these three strategies.

Bookmark and Share

{ 0 comments }

Will Trump’s Core Regulatory Principles Favor Hedge Funds?

February 20, 2017

On February 3, 2017, President Trump signed an executive order that outlined his administration’s core principles for regulating the U.S. financial system. They are: (a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; (b) prevent taxpayer-funded bailouts; (c) foster economic growth and vibrant […]

Read the full article →

How Vested Are Hedge Funds in Trump’s Success?

February 7, 2017

Hedge Fund Research and other respected sources suggest that hedge funds, taken together, gained about one-half of one percent in the month of January, far short of the S&P 500’s gain in the same period. With January in the record books and the balance of 2017 stretching out ahead, what does the future hold for […]

Read the full article →

What Was Under Last Year’s Tree for Hedge Fund Professionals?

January 23, 2017

For starters, around three-quarters of hedge fund professionals will not receive their bonuses until the first quarter of 2017, according to the  Hedge Fund Compensation Report, so, if there was nothing under the tree, no worries, it is coming. What Will Bonuses Look Like This Year? Although the financial media has painted a bleak picture […]

Read the full article →

How Will Hedge Funds Respond to a Dismal Year of Performance?

January 10, 2017

It can’t be sugarcoated. Hedge funds, for the third year running, have concluded another inauspicious year, not only in terms of gains, but also in the context of asset flows and industry growth. Glaring Failures Not to paint the industry with too broad a brush, it is important to begin by saying that the majority […]

Read the full article →

Hedge Funds Face Fierce Headwinds in the Fight to Grow Assets

December 12, 2016

It appears that the hedge fund industry, on average, will end 2016 on the wrong side of the S&P 500, the arbitrary benchmark, which in the eyes of many, heralds a successful level of performance. The S&P 500 is up some 10.5 percent year-to-date, while average aggregate hedge fund gains hover around 4.5 percent. Another […]

Read the full article →
Real Time Web Analytics