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, the S&P 500 went negative for the year, having lost all its year-to-date gains and then some. If misery loves company, hedge funds have found their cupid.

Stock Markets as Benchmarks

While this may be the ideal moment in time for hedge funds to make comparisons to the S&P 500 as something of a benchmark, most hedge fund professionals agree that the S&P 500 or the Dow Jones Industrial Average (DJIA) have no value as benchmarks for hedge fund performance because hedge funds are supposed to be uncorrelated. Why? Because they hedge! This necessarily mutes their relative performance in a bull market or rally, which makes any comparisons meaningless.

Moreover, hundreds of hedge funds have not a single stock in their portfolios. Hedge funds have multiple strategies, many of which are based upon investments in currencies, bonds, merger arbitrage, commodities, and other alternative assets that do not revolve around the stock markets.

How meaningful is a comparison to the S&P 500 or DJIA for hedge fund firms employing these strategies?

What Hedge Funds Should Do

These times cry out for the hedge fund industry to develop a meaningful metric that better informs current and potential investors, and silence those that would compare hedge fund performance to the S&P 500 or the DJIA, unhelpful benchmarks at best and downright misleading at worst.

HFRI, Hedge Fund Research Indices, although a respected industry benchmark, is not a satisfactory measure of a given hedge fund’s performance, nor, in fairness, is it intended to be.

For example, pension funds need an absolute return to pay their pensioners. Pension funds have fixed obligations which they must meet. It doesn’t help them much to know that their hedge fund is losing less money than the aggregate return of other hedge funds. In short, investors need to know if a hedge fund can meet their goals over a given time frame, not how it performed compared to an aggregate of funds, the S&P 500, or the DJIA.

The Problem

The boundary between a hedge fund and an active fund manager is blurred, at best. As a result, it might be accurate to say that no definitive hedge fund industry exists. Absent a distinct hedge fund industry, it will be extremely difficult to achieve an industry accepted method or metric against which performance may be measured. This gives rise to another issue. If there is no unambiguous definition of a hedge fund, it is impossible to ascertain the assets being managed at any particular point in time.

What about Hedge Fund Jobs?

Here is the point. The ability to benchmark hedge fund performance is, in many ways, just as important to job seekers as it is for potential investors. Do you want to begin your career at Burger King or Morton’s Steakhouse?

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Hedge Fund Research (HFR) reported an asset weighted composite index of -2.71 percent for the month of October, bringing the year-to-date asset weighted composite index to -0.98 percent, and HFR, in mid-November, is reporting continued declines, which suggest that November will also be in negative territory.

As a result, many media outlets are, once again, forecasting the demise of the hedge fund industry.

Are Hedge Funds in a Death Spiral?

The short answer is, no! However, one can make a reasonable argument that the industry is at an inflection point. As of November 23 2018, the S&P 500 was down 2.35 percent for the year and the Dow Jones Industrial Average was in the red as well, down by 2.17 percent, while hedge funds were down 2.71 percent.

It is therefor, fair to say, that hedge funds have fared no worse than the broader markets. At the same time, the hedge fund industry needs to recognize that performance results, which mirror the broader market, are not what investors signed up for.

Hedge fund firms must innovative new and improved investment solutions to attract the investment community. Additionally, hedge fund firms must learn to constrain themselves and project, in fact and in perception, the ability to reign themselves in from irresponsible investments. Moreover, the hedge fund industry must do a better job of keeping pace with the rise of artificial intelligence and other technological changes.

These and other changes are persuading many hedge fund firms to engage in some serious introspection, from the manner in which they serve their investors, to building a business that does not rely on the bespoke talents of its founder.

Key Issues Facing Hedge Funds

First and foremost, the hedge fund industry must determine a course of action which allows them to maintain their value to potential and existing investors.

Secondly, the industry needs to understand, identify and react quickly to external forces of disruption and global mega-trends.

Lastly, and most importantly for our readers, hedge fund firms need to alter their structure in a manner that allows them to remain relevant, not only to investors, but also the workforce of the future.

What about Hedge Fund Jobs?

Of the key issues mentioned above, relevance to the workforce of the future will be the subject of this section.

Expect to see a hiring shift toward hiring people with robust mathematical backgrounds. Be aware that any such hires will need to work effectively with existing staff who have a strong fundamental knowledge of finance and investing. This factor is crucial to the expansion of quantamental hedge fund firms. With this shift, a hedge fund’s search for talent comes into direct competition with the technology sector.

To be successful in this competition, hedge fund firms will need to look more like Silicon Valley. To accomplish this, they must foster internal collaboration and diversity in their workforce, as well as reinvent how they deploy and retain talent.

This bodes well for jobs in the hedge fund industry, which is not facing an existential threat, but rather a metamorphosis.

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