It has been another tough year so far  for hedge funds, which in the aggregate, stood in negative territory in May—down 0.09 percent. However, year-to-date figures are positive, with aggregate gains of 0.75 percent.

Interest Rate Uncertainty

The direction of the FOMC and its chair, Janet Yellen, is uncertain with respect to the timing of interest rate increases. Almost no one is suggesting the possibility of a return to zero, but the implementation date of a future rate increase is anything but clear.

Stock Market Remains Bullish

The extended bull market continues…to the detriment of the majority of hedge funds. Bull markets are historically problematic for hedge funds, representing an especially hostile environment for hedge funds pursuing equity and currency strategies. The 2009 – 2016 bull market is the second longest running of the post-war era, earning this spot near the end of April, 2016.

Exits and Brexits

The industry was rocked in Q2 with high profile redemptions by AIG, MetLife, and NYCERS. The Illinois State Board of Investment (ISBI) has voted to reduce its hedge fund investments by $1 billion and New Jersey’s pension agency is also contemplating cuts. The hedge fund industry’s high water mark of $3 trillion plus in assets under management continues to erode, having fallen to $2.86 trillion at last count.

The United Kingdom is poised to vote June 23, 2016, on the divisive issue of remaining in or exiting from the European Union. Polls suggest this will be a close vote and only the bookies are giving odds. If Britain leaves the EU, there will be political and economic consequences that will not only ripple across the pond, but around the globe. Hedge funds—gird your loins!

China’s Shrinking Footprint

China’s diminished GDP growth is reflected in a Yuan Renminbi valuation weaker than any seen since 2011. More troubling…a warning to China from the International Monetary Fund (IMF) regarding its mounting corporate debt, of which 55 percent is represented by state-owned enterprises.

European Slowdown  

Add Europe to the list of concerns because of its sluggish economic engine. While not as serious as China, it can be rapidly exacerbated by ongoing geopolitical threats manifested in the migrant crisis.

What about Hedge Fund Jobs?

Prospects are not as grim for hedge funds as one might conclude from the above litany of doom. Hedge funds are actually at their best when confronting adversity. Adversity was, after all, the very thing hedge funds were created to overcome.

According to the 2016 Hedge Fund Compensation Report, on average, less than 3 percent of hedge funds surveyed are planning a reduction in headcount and an average of 22 percent of firms surveyed are hiring.

Of course, events can always tip the scales. The Brexit, the FOMC’s rate decision, and sundry other variables that have not been discussed here, all have the potential to reshape the landscape. The important thing is to be prepared for any possible outcome.

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Who are these four horsemen? Pitiful performance, available alternatives, reduced fees, and impatient investors.

Abysmal hedge fund performance has been the norm for the past five years. Hedge Fund Research reported the global hedge fund composite to be down almost 1.2 percent when averaged over the past five years. Contrast this with the S&P 500, which is up more than 11 percent over the same period. Then there is the US bond aggregate which, according to Barclay’s, has seen gains of 3.6 percent over the same 60 months.

Hedge funds are not the only game in town. Liquid alternatives, the aforementioned bond market, and private equity firms are among the many investment opportunities prepared to usurp hedge funds as the investment vehicle of choice.

Incredibly, most available investment vehicles sport lower total fees than those charged by hedge fund firms.

Lastly, investors of all stripes are beginning to lose patience with underperforming hedge funds. Hedge funds that receive hundreds of thousands, if not millions of dollars, in management fees and earn nothing by way of performance fees are becoming the norm rather than the exception. Examples of this impatience include public pension funds like CalPERS and NYCERS. New Jersey legislators are contemplating a prohibition on alternative fund investment, which would include hedge funds. Massachusetts and Illinois are pursuing a similar path. However, insurance giants such as AIG and MetLife are also fleeing hedge funds. Pension funds and other large institutional investors represent 43.1 percent of hedge fund assets under management. Three years ago that number stood at 47 percent.

Is This a Trend?

Although these numbers suggest a trend, it is by no means confirmed to be one. The most telling story to follow is the one that reveals the eventual outcome of these high profile redemptions. Will these entities achieve superior results with other investment vehicles or will they discover that they zigged when they should have zagged?

What Is Certain?

Hedge funds are under enormous pressure to boost performance. Hedge fund fee structures, under attack for years, are also an increasing concern for potential investors. While the 2 and 20 model succumbed to pressure years ago, (1.3 and 15 is the current average) hedge fund fees remain at the apex in the investment world.

If hedge funds are to survive and thrive in the current economic climate, they must develop strategies that produce the gains investors will accept, coupled with fee structures that are reflective of fund performance.

What about Hedge Fund Jobs?

Many in the hedge fund industry predict dramatic reductions in the total number of hedge fund firms over the coming years. This is not an unreasonable forecast given recent events. However, diminishing numbers of firms does not automatically translate to fewer opportunities in the industry.

The 2016 Hedge Fund Compensation Report offers unique insights into the mindset of hedge fund professionals. One of the most telling sections of the report deals with job security concerns. Remarkably, only 27 percent of those responding cited performance as an issue and just 52 percent expressed any concern about job security.

Unless the aforesaid 52 percent wake up and smell the coffee, those predicting an apocalypse may be proven correct.

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Are Hedge Funds Best Days in the Rear View Mirror?

May 16, 2016

After reading some of the articles published in response to the SALT Conference sponsored by Skybridge CEO, Anthony Scaramucci, one might be persuaded that this is the case. However, the authors of these doom and gloom pieces fail to recognize the resilience baked into the hedge fund industry by virtue of the innovative and entrepreneurial […]

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Hedge Fund Professionals Are Remarkably Secure in Their Jobs

April 25, 2016

In most professional environs, back to back years of meager performance, are likely to raise serious job security concerns among employees. However, among hedge fund professionals, this passes as faulty logic. According to the 2016 Hedge Fund Compensation Report, a meager 8 percent of hedge fund professionals participating in the survey identified as being very concerned […]

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Equity Shares Shown to Have Declined in 2015

April 4, 2016

Equity sharing is an important variable to consider in determining the level of total compensation an individual will receive from his hedge fund firm. While equity or upside sharing is not a topic typically perceived as applicable to those just beginning a career in the hedge fund field, it ultimately becomes incredibly important to the […]

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The Goldilocks Principle and Your Hedge Fund Career

March 7, 2016

The Goldilocks principle states that something must fall within certain margins, as opposed to reaching extremes. As such, it is often associated with the search for life on other planets and explains the phenomenon of life here on planet Earth. In short, life is possible because Earth is neither too hot nor too cold, nor is […]

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Trump Defies Gravity and So Do Hedge Funds

February 22, 2016

Anyone following the primaries will recognize this phrase, used frequently in the context of Donald Trump’s foray into presidential politics. For example, in the recent South Carolina contest, the phrase was employed ubiquitously by talking heads in the mainstream media, who were largely incredulous regarding the margin of Trump’s victory in the wake of his […]

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