Here we are, well into the final quarter of 2018, and the hedge fund industry is having something far short of a spectacular year. According to eVestment, aggregate September global hedge fund returns dipped into the negative, with aggregate industry returns of -0.17 percent, bringing year-to-date gains to 0.53 percent, a far cry from the 7-plus percent 2018 gains investors were anticipating in the waning days of 2017.

Whose Fault Is This?

In a fascinating Barron’s article, dated October 5, 2018, the author seems to absolve the hedge fund industry of blame, suggesting that, “Surviving in the future requires that active managers go back to that past and take a more hedge fund–like approach.” The article was speaking broadly to the asset management industry, and this compliment to hedge funds, however left-handed, was extraordinary, given the dismal gains the industry has achieved this year.

The fact is, the hedge fund industry has faced 3 lethal forces, 1) a rampant U.S. bull market, and 2) an S&P 500 Index that is up 8 percent year-to-date, through September, and 3) a rapid economic expansion that central banks have reacted to by increasing interest rates. As a result, hedge funds have recorded their slowest growth in 3 years as of 2018 Q3.

Compounding the problem, is the fact that the hedge fund industry is measured against an inappropriate yardstick…the S&P 500. However unrealistic this may be, it is the de facto benchmark for the industry. Of course, an investment in a hedge fund is not comparable to an investment in the broader stock market, but the financial media continues with comparisons to the S&P 500. Let’s be frank, many investment vehicles fail to compare favorably with the S&P 500, including bonds, private equity and venture capital, to name a few.

There Are Positives

Prequin reports that hedge fund assets under management reached an all-time high of $3.61 trillion by the end of 2018’s first half. Moreover, North America had the distinction of being the sole region to generate net inflows through June 2018inflows totaling $22 billion, and fully 42 percent of North American based fund managers experienced those inflows.

Another positive is the fact that hedge funds are closing at a significantly lower rate. Hedge Fund Research (HFR) reports that hedge fund closures have been declining since 2017—for example, 125 funds were shuttered during 2018 Q2, while 2017 Q2 saw 222 hedge fund closures, a 44 percent decrease in year-over-year closures.

What about Hedge Fund Jobs?

Clearly, investors are not abandoning hedge funds. The absence of significant outflows and the organic increase in assets under management (record level) demonstrate that hedge funds are getting it done. Add in the net increase in the number of hedge fund firms and you have a favorable scenario for job opportunities in the industry, and particularly if you are job hunting in North America-based firms. As we stated earlier, 42 percent of North American based fund managers experienced capital inflows, and growth also means jobs.

While it is true that, in the aggregate, the industry is not enjoying its finest hour, there is no question that the industry is not only surviving, but thriving…in spite of what the talking heads would have you believe.

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A recent Morningstar article posed the question, “Will Hedge Funds Ever Recover?” Any hedge fund professional should find the title of this piece, at a minimum, condescending, and at most, downright maddening.

Averages and Aggregates

The financial sector, by nature, relies on numbers…numbers that quantify data. One can be excused for using averages and aggregates, but do they always prove the argument?

For example, worldwide average life expectancy is 70. 5 years, 78.74 years if you live in the United States. How many of us know people in their eighties, nineties? Most of us, to be sure. Conversely, how many of us have lost friends, family members, and colleagues at a much younger age. Again, most of us.

The average IQ in the United States is 98…in Egypt it is 81, yet, who built the pyramids?

In the United States, the average age for losing one’s virginity is 18.4 years. In Malaysia, the average age is 23.7 years. When did you…never mind.

The Morningstar article’s premise is largely based on average/aggregate hedge fund performance data, such as provided by HFR,which reports, by the way, that weighted composite index gains from August stood at 0.67 percent, for the year, 2 percent. Admittedly, not particularly stellar results for either time framebut these are averages! The aggregate performance of thousand of funds, of all sizes, of varied strategies and of various maturities.

Let’s Be Realistic

Few of us fear death simply because we are approaching 79 years of age, few of us even know our own IQ, and fewer still will decide against a hedge fund investment because the average aggregate year-to-date return is 2 percent.

The hedge fund industry is comprised of more than 10,000 firms, some large, some small, some pursuing a long/short strategy, others still are quant funds, macro funds, emerging market funds…the list is almost endless. Large funds tend to perform differently from small ones and certain strategies outperform others. For example, Left Brain Capital Appreciation Fund, a hedge fund, has generated year-to-date gains of 60 percent through August.

The automotive industry has many car manufacturers ranging from Rolls Royce to Bentley, Lamborghini to Jaguar and Yugo to Tata. The shoe industry also has a plethora of manufacturers, Nike to Converse, Bruno Magli to Cole Hahn and Crocs to Vans.

No single automobile is appropriate for every individual, nor is any particular shoe. In the same way, no single hedge fund meets the needs of every investor, nor does the average/aggregate hedge fund, if such a thing even existed.

What about Hedge Fund Jobs

Being discouraged from pursuing a career in the hedge fund industry is understandable, when those aspiring to seek work in this profession read headlines and articles such as the one cited here.

Let not your heart be troubled. Outstanding, high paying jobs are available for applicants from a broad range of backgrounds.

Stand strong for your hopes and ambitions. The hedge fund industry is thirsting for talent. It is a noble enterprise and like all enterprises, has its highs and lows.  Don’t allow a shallow headline deter you from your chosen path.

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Several events, which occurred just this month, should have stock pickers quaking in their Salvatore Ferragamo’s. According to the July 11, 2018, edition of the Financial Times, Facebook faces its first ever fine, which is a result of the Cambridge Analytica data scandal. Regulators in the United Kingdom’s Information Commissioner’s Office (ICO) accused Zuckerberg’s company […]

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