As 2017 marches to its close, thoughts inevitably turn to the promise and challenge of the New Year. The hedge fund industry is on track to achieve its most successful year since 2013 in terms of gains and assets under management.

Year-to-date gains, by most reports are 7.5 percent and assets under management have reached $3.25 trillion, a record high. Although hedge fund closures have outpaced new starts in 2017, many view this as a positive…market forces at work, weeding out the non-performers and strengthening the overall industry.

How Do These Metrics Affect Jobs?

Hedge funds suffered a significant series of redemptions, beginning with the September 2014 CalPERS announcement of its withdrawal from hedge funds. In 2016, the industry bled more cash than in any year following the financial crisis.

Unquestionably, a strong finish in 2017 will enhance job prospects. Many of the investors that fled hedge funds may re-think their positions with regard to hedge fund investment. Obviously, top-performing hedge funds will receive the lion’s share of investment from those returning to the hedge fund fold. As a result, we are unlikely to see hedge fund starts outpacing closures in the New Year.

That said, significant gains in AUM, almost certainly, would increase the number of job opportunities in the industry.

Passive vs. Active Investing

As many are aware, passive investment has been promoted by the likes of Warren Buffet and others of his ilk. Passive investment also received favorable treatment by many in the financial media.

As a result, passively managed AUM has grown from 12 percent in 2010 to 18 percent in 2016, according to the McKinsey Global Asset Management Report. Interestingly, despite this 50 percent jump in AUM, revenues remained constant throughout this period at 3 percent.

Consequently, any rational person has reason to question the viability of continued growth in this sector. Naturally, if AUM growth in passive investment does decline, hedge funds should position themselves to acquire the lion’s share of the reinvestment that will necessarily occur.

A Paradigm Shift in Portfolio Construction

The bull run, having celebrated its ninth birthday, is causing many investors to contemplate what happens when it ends. Hedge fund managers are no exception. As a result, we are beginning to see a transition of focus— a focus toward risk and performance drivers and away from asset classes. Just as retooling for a new model creates job opportunities in the auto industry, job opportunities will arise in the hedge fund industry as it “retools” for portfolio construction favoring risk and performance drivers.

Final Thoughts

Greater employment opportunities in the coming year are almost a certainty in the hedge fund industry. The level of human capital required by active investment is greater than what is required for passive investment.

Investor faith in hedge funds has been, to some extent, restored. Assets under management are likely to grow as a result. That, in combination with widespread concerns regarding the bull run’s end, is certain to drive investors in the direction of hedge funds as their interest in preserving capital is going to exceed their contempt for the hedge fund fee structure and diminish their interest for out-sized returns.

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Any mention of outsourcing strikes terror into the hearts of American workers, many of whom suffered joblessness and related economic hardships because of their jobs being outsourced.

Increasingly we hear the “O-word” in the same sentence with hedge funds and, unsurprisingly, this creates concerns for those who aspire to jobs in the hedge fund industry.

At the same time, we must consider the plight of emerging hedge fund managers, as they struggle to put together and run a successful firm. This past July, Hedgeweek conducted a global survey of 135 small and emerging fund managers to collect their views on outsourcing. It is titled “Outsource More but Have a Clear Risk Framework in Place” and much of what follows is based upon this report.

What Positions Are Outsourced?

The report actually begins with the jobs that are rarely outsourced. These include the Chief Operating Officer (COO), marketing positions, investor relations staff, business development staff and the Chief Risk Manager (CRM) and outsourcing in these positions ranges from 6 percent to 15 percent.

The most outsourced positions are legal staff, with 62 percent reporting that this is an outsourced function in their firm. That is followed by Chief Technology Officers (CTO), with respondents confirming a 44 percent rate of outsourcing. Lastly, we have the Chief Compliance Officer (CCO) role, which is outsourced by 31 percent of survey participants.

Why Do Managers of Emerging Funds Outsource?

Initially, everyone regards the decision to outsource as a cost cutting measure but it is more complex than simply budgetary considerations. One has to understand that these emerging funds are typically founded by portfolio managers/traders that suddenly become business managers. One can certainly grasp the appeal of outsourcing for such individuals. After all, managing a hedge fund is many multiples more complex a task than occupying a position in the front office of an existing fund.

While cost savings are undeniably a factor, much of the decision regarding outsourcing depends on the expertise the manager possesses. Once the emerging manager has established his personal limitations, he/she will turn toward outsourcing to close the gaps. Of course, these outsourcing decisions must also be justified in economic terms. Additionally, his/her investors must be satisfied that all bases are covered.

What Is the Effect on Hedge Fund Jobs?

Realistically, any hedge fund startup should be viewed as another opportunity for employment. The fact is, the overwhelming majority of job seekers will be seeking to fill positions below the level the report cites as prime targets for outsourcing. More to the point, the fact that positions in emerging and small funds are being outsourced is largely irrelevant, because these are positions that still need to be filled, whether they are in-house or not.

In short, it is unlikely that outsourcing will produce the same ill effects we have seen in other industries, such as manufacturing and customer service. More hedge funds mean more jobs and the “O-word” should not prove a serious concern for hedge fund industry job seekers.

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Hedge Funds Are Not Immune from Fake News

November 13, 2017

The current buzzword, fake news, begs the question, how often does one encounter fake news? It must occur with some degree of frequency, because pollsters report that two-thirds of the American public believes the mass media peddles fake news. There are larger questions. Is fake news the result of carelessness or is it done intentionally? […]

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Will Hedge Funds Discover Gold in Data Mining?

October 30, 2017

The digital age created revolutions in a variety of industries, including the retail, banking, motion picture and music industries. The rise of alternative data vendors also holds the potential of a similar revolution in the hedge fund industry. Hedge funds are always on the make for an edge in the markets and alternative data vendors […]

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Can You Write Your Way into a Hedge Fund Job?

October 16, 2017

People of diverse backgrounds have found a home in the hedge fund industry – lawyers, computer scientists, investment bankers and public accountants, to cite a few. According to the 2017 Hedge Fund Compensation Report, the previous professional backgrounds of about 14 percent of hedge fund professionals are lumped into an amorphous category termed “other”, which […]

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NYC Job Seekers Need to Prepare for a Change in the Law

October 2, 2017

Have you heard? In an effort to close the wage-gap between men and women in the workplace, New York City Mayor Bill de Blasio (D) signed an amendment to the New York City Human Rights Law. This law takes effect on Halloween. Commencing October 31, no employer may inquire into the salary history of prospective […]

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Investor Confidence in Hedge Funds Continues to Soar

September 18, 2017

Prequin reports the hedge fund industry has achieved gains in positive territory for 10 months in a row, with aggregate August gains of 0.97 percent. This is the longest streak of month-to-month gains since the financial crisis, and suggests the hedge fund industry has finally found its feet. Investors Are Taking Notice As has been […]

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