Both 2018’s hedge fund performance record and Super Bowl LIII results are in the record books. While it is relatively simple to understand the past, the future is exponentially more difficult to grasp. More than three-hundred fund managers and 120 institutional investors participated in a Prequin survey in an attempt to divine the future of the hedge fund industry. Here’s how they perceive the next 5 years unfolding.

Hedge Funds Fall to Second Place

Currently, hedge funds are the largest class of alternative investment and is predicted to grow by 31 percent over the next 5 years to become a $4.7 trillion industry. However, private equity is anticipated to grow by $1.8 trillion in the next 5 years, eclipsing hedge funds by reaching $4.9 trillion in assets under management.

Shrinking Hedge Fund Investment

Among those currently invested in hedge funds, around 1 in 4 expect to increase their allocations to hedge funds over the next 5 years, while fewer than 2 in 10 plan a decrease in their hedge fund allocations.

Evidence supports that this is already happening. For example, hedge funds experienced net outflows of $11.1 billion in 2018. More to the point, this recent article in Bloomberg presents a graphic illustration of attrition in some of the most lauded hedge fund firms in the industry.

Modest Growth in Hedge Fund Allocations Is Not Necessarily a Negative

Those investors who do allocate to hedge funds tend to invest a larger percentage of their portfolio, typically 14 to 15 percent, as compared to private equity (PE) investors, for example, who typically top out at 9 to 10 percent of their portfolio.

This suggests that even though the number of hedge fund investors may shrink, the size of their hedge fund investment will mitigate the loss of those investors who seek a haven in other alternative asset classes.  In short, the growth of hedge fund assets under management will be slower, but steady.

Single & Multi Family Offices Are Showing Increased Interest in Hedge Funds

Fully two-thirds of hedge fund managers surveyed, believe that family offices will become their primary sources of capital over the coming 5 years. This is consistent with the private wealth origins of the hedge fund industry and a marked departure from the past 15 years of growth, which was driven by institutional investors. Hedge funds are returning to their roots!

What Does This Mean for Hedge Fund Jobs?

The rapid expansion of hedge funds and the corresponding increase in the numbers of hedge fund managers and staff is a well-established fact. However, the universe of active hedge fund firms has leveled off since 2016 to approximately 14,800 hedge fund firms world-wide. Hedge fund managers are largely agreed (91 percent) that consolidation will be the hallmark of the next 5 years, with 26 percent of hedge fund managers suggesting that the consolidations will be significant.

If these predictions come to pass, one might reasonably anticipate substantial employee turnover. The manner in which hedge fund managers approach these challenges will determine the future for jobs in the hedge fund industry.

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In Alpha Calling’s previous article, Hedge Funds: A Positive Perspective on 2018, the timing of its publication was such that a definitive conclusion on year-end hedge fund industry performance could not be reached, as the conclusion required access to yet unpublished HFR data for Q4. Moreover, it would have been inappropriate to use another source inasmuch as HFR was used as the data source throughout the first 11 months of analysis. However, we now have that data. Just as predicted, the HFR asset weighted composite index came in negative, to be precise, -0.68 percent, bringing year-to-date aggregate hedge fund losses to -0.84 percent. This compares very favorably to the S&P 500’s year end result, which found that index down -6.24 percent.

Index Definitions

Careful readers may have noticed that the basis of the analysis is the HFR asset weighted composite index as opposed to the HFR fund weighted composite index. Hedge Fund Research (HFR) data was employed for this brief analysis, largely because Hedge Fund Research is regarded as the doyen of the hedge fund industry.

The HFR asset weighted composite index was used, as opposed to the HFR fund weighted composite index because it offers the fairest overview of industry performance. Per HFR, “the constituent funds of the HFRI Asset Weighted Composite Index are weighted according to the AUM reported by each fund for the prior month.” Careful observers will note that most media outlets choose the HFR fund weighted composite index as a reference point. Readers may draw their own conclusions as to why this is so. Also, it should be noted that neither index includes funds of funds.

HFR sports a variety of indices. Anyone interested in exploring their definitions can find them here.

Relative Performance

Alright—2018 ended in the red for the hedge fund industry as a whole—we get that. As has been stated in previous articles, it is understood that, for whatever reason, media outlets will use this to paint hedge funds in the most unfavorable light possible. However, the facts are the facts!

Hedge funds outperformed the DJIA and the S&P 500 in 2018. For example, the S&P 500 closed the year down -6.24 percent, which means hedge funds, in the aggregate, outperformed the S&P 500 by 643 percent!

What’s Ahead for Hedge Funds and Hedge Fund Jobs?

Prequin, another hedge fund industry doyen, in its recent report entitled The Future of Alternatives, offered several interesting insights from their survey’s participants, the most notable of which projects the hedge fund industry to reach $4.7 trillion in AUM in 2023.

However, the same report also projects that hedge funds will slip to second place in the pantheon of alternative assets, overtaken by private equity, currently in second place. The report also concludes that growth in the number of hedge fund firms has plateaued, with some 14,800 firms in the hedge fund universe, a figure that has remained largely unchanged since 2015, which year marked the apex of the post financial crisis explosion of hedge fund starts.

The next 5 years will be ones of firm consolidation and, as a result a shrinking universe of hedge fund firms. However, within an industry whose assets are expected to grow by 31 percent over the next lustrum, it is clear that opportunities in the hedge fund industry will be plentiful.

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Hedge Funds: A Positive Perspective on 2018

January 7, 2019

Investors began 2018 with a cautiously optimistic view, duly supported by 2017’s positive returns, which paralleled the market rally. Hedge fund managers, broadly speaking, shared this hopeful vision and looked forward to improved performance and enhanced fundraising opportunities in 2018. A Look Back The year 2018 opened with a robust January HFR asset weighted composite […]

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Will Poor Hedge Fund Performance Hurt Jobs?

December 24, 2018

Here we are, in the closing days of the worst year for the hedge fund industry since the financial crisis. According to HFR, hedge funds, in the aggregate, were down .16 percent in November and 2 percent for the year. Concurrently, Eurekahedge data suggest that the combined effect of investor redemptions and performance based losses […]

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Benchmarks: Important for Investors and Job Seekers

December 10, 2018

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, […]

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Is the Hedge Fund Industry Facing an Existential Threat?

November 26, 2018

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, […]

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When You Think Finding the Job Is Harder than Doing the Job

November 12, 2018

Regardless of one’s level of preparation, the hunt for a hedge fund job can be exasperating at times. Setbacks and rejections are inevitable, as is the case for most on the job quest, and setbacks and rejections are certainly not exclusive to those seeking a career in the hedge fund industry. Improvements in unemployment rates […]

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