The hedge fund industry saw its assets under management climb to $2.6 trillion in 2012 as strong performance and net investment inflows benefited the sector. Performance alone accounted for $116.3 billion in growth as stronger global markets created more opportunities for hedge fund managers. In terms of investor flows, the sector saw $29 billion in new client money while $10.5 billion was withdrawn, primarily in the fourth quarter as a result of the uncertainty surrounding U.S. tax changes.
While the strong nominal performance of hedge funds will certainly be viewed positively by some, the relative performance of the industry is leaving some investors uncertain about continuing their commitment to the asset class. Equity indices have outperformed hedge funds by a substantial margin over the past couple of years and investors are becoming impatient.
This view, however, ignores the fundamental reason why individuals and institutions invest in hedge funds. Most investors aren’t necessarily looking to beat a benchmark in a single year, but rather are seeking an investment with low correlations to equities that attempts to earn consistent absolute returns over time. For investors that are using hedge funds in this role within their portfolios, the positive nominal returns will be welcome news.
Chinese Hedge Funds were One of the Strongest Segments
In China, hedge funds posted a strong performance for 2012, ending the year up 12 percent. After trailing both local equity indices and global hedge fund benchmarks for much of the year, the Chinese funds posted outstanding December results. This reflects well on the increasing prominence of hedge funds in the Asian investment marketplace.
Strong Performance Continues into First Quarter of 2013
If the first quarter of 2013 is any indication of the year ahead for hedge funds, the outlook should be quite optimistic. According to HedgeWeek, in January the Dow Jones Credit Suisse Core Hedge Fund Index closed up 1.61 percent, with all seven component strategies posting positive returns. The strongest segments of the index were managed futures and event driven funds, while global macro and fixed income arbitrage were the weakest performers, although they still posted positive results.
Most hedge fund strategies will benefit from an improving global economy, despite claims of low correlation with equity indices. If the United States returns to stronger economic output and Europe continues its recovery in 2013, hedge funds could see overall improvement in their nominal returns even beyond the success of 2012.
What Does this Mean for Hedge Fund Industry Job Seekers?
The hedge funds remain one of the few robust sectors of the finance and investment world. With investment banking and trading operations facing increasing investor and regulatory pressure, hedge funds have weathered the storm quite well. The attractiveness of a low correlation asset class that provides yield in excess of historically low bond returns means investors will need to keep hedge funds on their radar as part of a balanced portfolio going forward. As a result, as long as fixed income returns stay low, hedge funds should be looking to expand their teams with new talent throughout 2013. Competition in the industry remains fierce however, with many former investment bankers along with asset managers from other financial industry segments looking for available opportunities.