Hedge funds, and those who manage them, have been under relentless media attack for the past 5 years for failing to outperform the market. But, outperforming the market may not be the principal objective institutional investors and high net worth individuals (HNW) expect from an investment in hedge funds.

If That Were True

Alternative investing is on the rise and hedge funds are garnering a significant share of these investment dollars. McKinsey & Co. predicts that alternative investments will generate forty percent of the asset management industry’s global revenue by 2020. Alternative investments totaled $7.2 trillion at the close of 2013 and hedge funds had a twenty-seven percent share, with $2 trillion under management, which ballooned to $3 trillion at the close of 2014.

Logically, if outperforming selected market indices, such as the S&P 500, were the investors’ bellwether, hedge fund growth would be in negative territory given its decidedly lackluster performance compared to the market during the past 5 years.

Why Do Hedge Funds Continue to Thrive?

No single response  adequately answers this question, but contrary to what many would suggest, HNW individuals and institutional investors are not drawn to hedge funds because of an allure to the exotic, or because investors are like sheep, or because of sundry non-quantifiable reasons offered in defense of hedge fund investment. A number of factors contribute to the continued growth the hedge fund industry enjoys but, the most defensible reason hedge funds thrive, is that they provide respectable risk-adjusted returns.

Simply put, the safety of a hedge fund investment, relative to its rate of return, is acceptable to a high percentage of institutional and HNW investors. Such investors are not looking to the S&P 500 as a benchmark, but rather to Treasury bill rates, bond rates and rates of return on similar investments that are deemed extremely low risk. For these investors, capital preservation is the paramount consideration and returns are secondary.

In short, the typical hedge fund investor seeks maximum return at minimal risk. Those responsible for investing pension funds, college endowments and family fortunes lack the stomach for market volatility and, their fiduciary responsibilities place them in conflict with high risk investment options. Respectable risk-adjusted returns are a commodity that hedge funds have consistently delivered for decades and for this reason, hedge funds continue to thrive.

Does This Bode Well for Jobs?

While there is no proven methodology for estimating staffing requirements for incremental increases in hedge fund assets under management, a conservative estimate suggests that one additional staff member is required for each $125 million increase in assets. If hedge funds experience year-over-year growth in a range similar to the $1 trillion increase from 2013 to 2014, the future looks bright for hedge fund jobs.

If the McKinsey & Co. predictions are to be believed, those with an entrepreneurial spirit might consider creating their own job by starting their own hedge fund. The growth in the hedge fund industry is undeniable. If you possess the right skill set, there may be no better time to make the leap!

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Hedge fund managers confront countless economic variables as they pursue twin goals of preserving and growing capital. Of these sundry economic variables, two of the top ten keeping them up at night are undoubtedly declining oil prices and the Asian/European economic slowdown.

Shrinking Oil Prices

Gasoline-smallAs oil prices continue to tumble, the impact on the equities market must be a major concern to hedge fund managers, irrespective of the strategy they pursue. Oil is such an integral component of almost every enterprise imaginable, directly affecting metals, transportation, manufacturing, energy, and indirectly impacting all sectors of the economy.

Of course, the trick is to understand the nature of the impact. Will it be positive or will it be negative? For example, falling gasoline prices serve as a de facto wage increase for consumers. It is estimated that every $10 drop in oil prices translates to a $50 billion annual savings on fuel costs, which bodes well for the consumer goods sector. Similarly, the transportation industry may see windfall profits as fuel prices spiral down. Energy stocks may dip and the solar power industry may be stalled. The already uncertain future for coal may become even worse.

Then we have the geopolitical concerns to consider and how the economies of countries like Mexico, Venezuela and Russia will react … not to mention Iran, Iraq and other oil-producing nations of the Middle East and Africa.

Logically, market forces will eventually stabilize oil prices, but, when, at what level, and at what geopolitical cost? These are the great unknowns hedge fund managers need to nail down.

Asian/European Slowdown

Japan, the world’s third largest economy, is officially in recession. China’s double digit growth has slowed to single digits, and Europe, led by Germany, is fumbling toward recession.  While these events have contributed to a stronger U.S. dollar, that in itself has the potential of being problematic for the economy of the United States by making our exports more costly abroad.

Inasmuch as exports account for 13.8 percent of the U.S. economy, a stronger dollar is somewhat counter-productive. However, most economists take the position that neither lower oil prices nor the Asian/European slowdown are sufficient to diminish the U.S. annual rate of growth from its current 3 percent pace.

On the Jobs Front

Although hedge fund closures in 2014 outpaced hedge fund startups, the overall net impact was minimal. Clearly, opportunities will be more robust for job seekers with a strong foundation in oil-related investments. Similarly, job seekers with substantive global macroeconomic experience should also have a leg-up on the competition.

The overall number of hedge funds shrank in 2014 but this was countered by net inflows exceeding $225 billion, which pushed assets under management to record highs. While it cannot be assumed that legions of new hires will be required to manage this surge of investment dollars, it does suggest that the industry is healthy, vital and growing.

As long as this trend continues, there will be opportunities for those with the “right stuff” and, at this moment, the right stuff would be the know-how required to deal with oil, Asia and Europe. In short, everyone who can help these hedge fund managers get a good night’s sleep.

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Hedge Fund Closures Approach Record Rates But There Is a Silver Lining

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Pundits are quick to pounce on the near record numbers of hedge fund firms that have folded their tents in 2014. However, it is necessary to consider the alternate side of the balance sheet. New hedge fund firms are cropping up at near record levels as well, with less than the equivalent amount of fanfare. […]

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Hedge funds have been enjoying something of a heyday, growing to an unprecedented $2.82 trillion in assets under management (AUM), since the dark days of the financial crisis. However, these lofty sums pale in comparison to the potential 11 trillion investment dollars controlled by an estimated 3.35 million high net worth individuals (HNWI) in the […]

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Hedge Funds: An Appetite for Data

December 1, 2014

No one in the hedge fund industry would challenge the proposition that data is a crucial factor in meeting these primary hedge fund manager objectives: Investor transparency with respect to risk and performance Accurate and timely compliance information for regulators Adherence to operational best practices to enhance performance The challenges of sorting, storing and utilizing […]

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What Will the End of ‘a House Divided’ Mean for Hedge Funds?

November 17, 2014

Tuesday’s election results rang the death knell for a divided Congress. Republicans have earned clear majorities in both the House and Senate for the first time in twenty years. How this will affect economic policy, tax reform and market regulation is the subject of considerable interest and no small measure of speculation in the hedge […]

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Millennials: Ignore Them at Your Peril

November 3, 2014

While perception and reality frequently converge, this is not always the outcome. Millennials are an excellent case in point. Conventional wisdom suggests that adult Millennials (a/k/a generation “Y”), those between 18 and 33 years old, have no money. Prudent hedge fund managers, particularly those aspiring to grow assets under management by way of the retail […]

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