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 spirit of hedge fund founders.

What is undeniable, are the relentless attacks from the remaining candidates of both political parties directed broadly toward the über-wealthy and specifically toward hedge fund founders. Each of these candidates, in their own way, wishes to right perceived wrongs with regard to the rates at which these fund managers are taxed.

Change Is Inevitable

As a practical matter, one of these individuals will be the next President of the United States. Whether it is Hillary Clinton, Bernie Sanders or Donald Trump, demands for reforms in the tax law will be put forward…changes that will not bode well for the one percent in general and hedge fund managers in particular. However, to suggest that hedge funds will no longer play a major role in the financial system is ludicrous.

Carried interest is the principal target of the proposed reforms and, as a practical matter, has been the subject of debate long before this election cycle. This provision, which taxes specific investment income as a capital gain rather than ordinary income, is an undeniable, but completely justifiable, perk.

That said…its days are very likely numbered in this populist, political climate.

Among the topics of renewed discussion are hedge fund fees. It is amusing that a preponderance of those in the financial media continue to reference 2 and 20 management and performance fees as if they were the industry standard. These days, very few hedge fund firms can negotiate a 2 and 20 fee structure with an investor.

Hedge Fund Jobs

No reasonable person will deny that eliminating carried interest will have an impact on hedge funds. And yes, the impact will reach beyond the founder. Upside sharing is a common practice in the industry. According to the 2016 Hedge Fund Compensation Report, twenty-five percent of hedge fund employees receive an equity share. This upside or equity sharing is a function of carried interest.

What many do not recognize, is that 13 percent of the 25 percent who receive an equity share actually get less than 2 percent. Only 6 percent of the 25 percent receive 11 percent or more. In short, it is a very select group within the fund that reap the benefits of carried interest.

Will this select group bemoan its loss? Absolutely! Will it signal the demise of hedge funds? Certainly not!

More to the point, hedge fund professionals just entering the firm, and those with only a few years under their belts, are unlikely to be among the 25 percent receiving this perk. In this regard, the elimination of the carried interest provision is a non-event for 75 percent of hedge fund professionals.

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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.

Fig 35 - Job Security 2016According to the 2016 Hedge Fund Compensation Report, a meager 8 percent of hedge fund professionals participating in the survey identified as being very concerned about job security. Equally stunning is the fact that 48 percent of respondents do not view job security as a concern of any magnitude. The remaining 44 percent acknowledges being somewhat concerned.

Really…Only Somewhat Concerned?

This statistic is clear evidence of the supremely confident mindset of the hedge fund professional.

Despite real fund performance issues, constant assaults on management and performance fees, mindless income tax rate comparisons, formidable regulatory pressures and daily doses of unflattering media coverage, most hedge fund professionals (92 percent) are confident in their value to their respective firms.

Job Security vs. Job Satisfaction

Many will expect to see a strong correlation between job security and job satisfaction. However, the aforementioned Compensation Report reveals quite the opposite. Although 92 percent of the survey’s respondents were largely positive with respect to their job security, 56 percent of these hedge fund professionals define themselves as unhappy with their level of compensation.

What’s in the Cards for 2016?

First quarter returns for hedge funds, in the aggregate, are in negative territory. Troubling as this may be, even more troubling is the fact that the New York City Employees Retirement System (NYCERS) has voted to abandon hedge funds as an investment vehicle. Citing the 1.88 percent loss its hedge fund investment experienced last year, NYCERS will redeem $1.45 billion.

The New York City Employees Retirement System’s hedge fund investment is about 2.75 percent of its $53 billion portfolio. Not surprisingly, precious few media reports on the subject acknowledge that hedge fund returns for NYCERS over the past three years averaged a positive 2.83 percent. While this three-year return is hardly the stuff of legend, it does place NYCERS decision in a different light. Even the amateur investor understands the value of a track record in making investment decisions.

Hedge Fund Jobs

While the NYCERS choice is troubling, it is no more significant in its consequences than was the CalPERS decision or more recently, AIG’s redemption announcements. In their totality, it is reasonable to identify this as a trend and the trend is beyond troubling.

The hedge fund industry can and will rationalize these events, dismissing these redemptions as inconsequential in the grand scheme of things. However, they may do so at their peril. While it is true that, as a percentage of assets under management, these redemptions are drops in a barrel, the industry must acknowledge that even a barrel that leaks only “drops” will empty its contents over time.

As anyone following Showtime’s Billions can tell you, there are reasons Bobby Axelrod has a full-time psychiatrist on the payroll.

 

 

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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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What You Need to Know About Hedge Fund Bonuses

February 8, 2016

Bonus pay is a critical segment of one’s total compensation in the financial sector in general and hedge funds in particular. It is not uncommon for those in the highest pay bands to earn bonus pay that is many multiples of their base salary. Predictably, the percentage of one’s total compensation represented by bonus pay […]

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What Sized Hedge Fund Promises the Best in Compensation?

January 25, 2016

Most people gravitate to a career in the hedge fund industry for the earning potential. After all, flexible working hours, a low stress work environment and job security are not perks generally associated with the hedge fund industry. Investors have debated the pros and cons of small, medium and large hedge funds for years. Some […]

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