While it may be true that fewer MBA holders are entering the hedge fund industry, it is certainly true that recent headlines suggesting that these students “scorn” hedge funds or that fewer MBAs “want to work” for a hedge fund border on fiction.

Here Are the Facts

The articles referenced above are inspired by Training The Street’s (TTS) seventh annual MBA Employment Survey, which encompasses 293 first and second-year student respondents. This is not a large sample. Therefore, it is not unreasonable to assume a margin of error in the 2 percent to 3 percent range.

In last year’s survey, 4.9 percent of participating students aspired to a hedge fund job. This year’s survey saw that drop—to 4.78 percent. This is a 2.45 percent year-over-year decrease, but, when the margin of error is taken into account, the significance of this statistic diminishes. To interpret this statistic as evidence of MBA scorn for hedge funds or being indicative of fewer MBAs wanting to work in the industry strains credibility.

Additionally, 3 percent fewer survey respondents reported being the subject of hedge fund recruitment efforts. This is a more defensible case for any decline than is scorn for, or lack of interest in, the hedge fund industry.

An Honest Take on the Survey

There has been no statistically significant movement in the percentage of MBA students who have expressed an interest in pursuing a hedge fund career, and, therefore, no basis in TTS’s MBA Employment Survey to support the negative tone of the headlines referenced above.

Scott Rostan, Training The Street’s founder and CEO, said it best, “While positions at hedge funds, private equity firms, and to some extent startups, are highly coveted job posts, they are only available to a select few MBAs. Job seekers understand this reality and are focusing their job search on more readily available positions in banks and consulting firms.”

It is fair to say that “scorn” is NOT a factor. It is also apparent that students are placing the need for employment ahead of what they may “want” in a job.

Hedge Fund Compensation

While Mr. Rustan is dead-on with regard to hedge fund selectivity, it would behoove any MBA student aspiring to a hedge fund career to bone-up on the earnings potential an MBA enjoys in the industry. According to the 2016 Hedge Fund Compensation Report, hedge fund employees with an MBA enjoyed a mean base pay of almost $186,000 and a mean bonus check approaching $270,000 for total mean earnings of around $456,000 annually.

To put this in perspective, 16 percent of the MBAs surveyed by TTS earned between $76,000 and $99,000, while thirty-six percent fell into the $100,000-$124,000 tier. Only 40 percent can boast an annual base salary exceeding $124,000.

Hedge Fund Jobs

Employment in the hedge fund profession can be a lucrative proposition, especially for individuals holding an MBA.

Prudent investors perform their due diligence on all investment prospects. They do not rely on headlines, tips and biased reporting. A student is also making an investment when deciding the direction in which he will take his career. Make no mistake—this investment deserves the same due diligence.

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This is a top-of-mind question for institutional investors and the answers are as varied as the hedge fund industry. Obviously, the answers offered can’t all be accurate. Furthermore, answers will necessarily differ from one fund strategy to another.

Morgan Stanley conducted a survey at a recent conference of long/short fundamental equity hedge funds. Morgan Stanley’s equity strategist, Adam Parker, wrote in a recent article that the top three reasons proffered for the poor performance experienced by long/short equity funds were; 1) crowding, 2) factor exposure and 3) stock selection, in that order.

Are These Defensible Responses?

Crowding, by definition, is the scenario in which too many dollars are chasing the same trade. While this may be true, it smacks of ‘group-think’ and, one likes to think of hedge funds and their managers as independent, innovative thinkers.

Factor exposure, as we know, suggests that acknowledged risk, in the face of a specific event, was underestimated. This is a less than flattering admission to make. Investors have been promised a greater degree of competence than this response implies.

Stock selection is largely self-explanatory. It is a blanket acknowledgement that firms selected poorly performing stock. Although third on the list, it is perhaps the most accurate answer of any given for the long/short fundamental strategy.

Some Soul-Searching Is Required

Crowding and factor exposure are really two sides of the same coin. That coin, in the case of a long/short fundamental strategy is stock picking; yet, it was number three on the list of responses as dead last.

Is it possible that there are just too many dollars invested in too few stocks or, is it possible there are more hedge fund firms than the market will bear? Blackstone’s president, Tony James believes the hedge fund industry’s assets under management will shrink by as much as 25 percent in the coming year. James attributes this to performance.

Bottom-Line

The hedge fund industry needs to get its head around the problem and correct it. The critical element is defining the problem. Is it, in fact crowding? Is it factor exposure? Is it stock selection? Or, is it something else entirely?

Many argue that ISIS can’t be defeated because the threat isn’t being appropriately identified. The same may be true with hedge funds. Under performance can’t be turned around until the cause has been clearly and accurately defined. If hedge funds practicing a long/short fundamental strategy define crowding as the number one reason for under performance, Mr James may be proven right.

Hedge Fund Jobs Are at Stake

Clearly, assets under management will not shrink at hedge fund firms that are delivering alpha returns. The funds at risk are those delivering beta…or worse. Moreover, there is no certainty that assets would flee hedge funds. The more likely scenario is that hedge invested funds would flee beta for alpha.

As a result, the prospects for hedge fund employment remain relatively static, although it must be acknowledged that diminished prospects are more probable than enhanced ones. That said, opportunity’s knock smiles more favorably on those prepared to answer the door.

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Will Hedge Funds Fail in the Brexit Aftermath?

June 28, 2016

The recent UK referendum, which resulted in the United Kingdom’s exit from the European Union, has rocked the financial world. The value of the pound plummeted to lows not seen in thirty years, exemplified by today’s valuation of the pound at $1.33, down from $1.48 immediately prior to the vote. The initial reaction of global […]

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Hedge Funds Close the First Half with Few Positives

June 13, 2016

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 […]

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Hedge Funds Face-Off with the 4 Horsemen of the Apocalypse

May 31, 2016

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 […]

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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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