Prequin reports the hedge fund industry has achieved gains in positive territory for 10 months in a row, with aggregate August gains of 0.97 percent. This is the longest streak of month-to-month gains since the financial crisis, and suggests the hedge fund industry has finally found its feet.

Investors Are Taking Notice

As has been noted in previous articles, hedge fund flows have been largely positive throughout these 10 months indicating renewed investor confidence.

According to HFR’s Market Microstructure Report, hedge fund closures fell to 222 in the second quarter, down significantly from 259 first quarter closures. Concurrently, 189 new funds launched in the first quarter of 2017 followed by 180 startups in the year’s second quarter.

The trend of closures outpacing new startups has continued throughout 2017, with 481 closures versus 369 startups through the first half of the year. Market forces continue to punish poorly performing funds and reward the best performing funds with continued inflows. Although the total number of hedge funds is in decline, assets under management have continued to rise to record levels.

No Crisis of Confidence

Based upon data provided by eVestment, hedge funds, taken together, are up 5.5 percent this year, just 20 basis points below full year returns for 2016. Another way to express this is that hedge fund returns have nearly doubled in 2017 as compared to 2016.

Large investors are beginning to recognize that the transition from hedge fund investment to cheap stock bets and private asset strategies have been costly. This is but one of several reasons that hedge funds continue to grow assets under management.

It is becoming clear to the investment community that disappointing hedge fund returns are proving to be more cyclical than structural. The post financial crisis spawned an FOMC policy of exceedingly low interest rates, which artificially inflated stock prices and other asset classes. As these policies normalize, hedge funds will rise. Expensive valuations and low returns are making investment in private equity, venture capital and other non-traded asset classes less attractive. Hedge funds are certain to be the beneficiary of investment shifts.

What about Hedge Fund Jobs?

As investors of all stripes return to the hedge fund fold, job opportunities in the hedge fund industry will continue to rise. Stock pickers, with a proven record of accomplishment may have the best window of opportunity. Hedge funds that pursue an equity strategy are at the top of the heap in terms of gains this year.

As a result, one is likely to witness a resurgence of funds that follow an equities strategy, manifested in startups as well as in existing funds shifting into equity. Startups may offer the best opportunities, as will funds currently pursuing equity strategies.

This, coupled with the overall growth in assets under management, will be the drivers of job opportunities in the hedge fund industry. Continued improvement in the overall performance of the industry will not only entice investors to return to the fold, but also provide increased job opportunities for those desiring a career in hedge funds.

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Financial journalists have made an easy living writing articles on hedge funds based upon a formula. Just as formula writing results in some of the shallower situation comedies in television history, formula hedge fund articles fail to inform potential investors in a comprehensive manner.

Such articles follow the following formula.

Step One

Create a chart of aggregate hedge fund returns as compared to the S&P 500 over the past “x” number of years. The number of years may be decided arbitrarily or intentionally depending on the goal of the author. This chart is then followed by one or two paragraphs of narration, typically deriding hedge funds as an under-performing investment vehicle, which any investor must avoid at his own peril.

Step Two

With, or without a graph, delve into the dark world of industry outflows. These can be defined as net of new investments…or not. Again, the choice depends solely on the author’s intent. The same applies to the number of month or years the author chooses to highlight. This is followed by a few examples of high-profile investors that have fled the industry. Typical examples invariably include CalPERS. Of course, these outflows must be tied to performance.

Step Three

Step 3 requires the author to rage against the exorbitant management and performance fees charged by hedge funds, pointing out the standard 2 and 20 structure (never mind that this is antiquated and hardly representative of the majority of hedge funds today).

This diatribe must be followed by quotes from one or more iconic hedge fund hater, Warren Buffet being the popular choice. Naturally, hedge fund fees must be attributed to negative investor sentiment.

Elements of Truth

While it is true that hedge fund performance, in the aggregate, has been less robust in recent years, these formula articles do not address the fact that most hedge fund investors use hedge funds to avoid exposure to the broad equity market. After all, they could make such an investment themselves and avoid the management and performance fees entirely.

Hedge fund investors are in pursuit of risk-adjusted returns that fulfill a role in their portfolio, which cannot be economically duplicated by internal investment teams. These skills command fees, although rarely 2 and 20. Outflows always take place and, although performance is high on the list of causes, there are many other reasons. More to the point, net outflows are the important benchmark, as many investors will reinvest in other hedge funds.

What about Hedge Fund Jobs

More than ever before, hedge funds are competing with other industries for talent, venture capital, private equity, and Silicon Valley to name a few. It is imperative that job seekers understand the vital role hedge funds play in our economy Five-hundred word articles should not be the basis for a career decision. The machinations of a hedge fund are too complex to be addressed in a few paragraphs.

Remember, one should not take everything one reads at face value. There is always another angle to the story. Do yourself a favor. Before dismissing the thought of a hedge fund career, make an effort acquire an in-depth understanding of this fascinating industry.

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