The former reality of frequent hedge fund launches is no more, with tighter fee margins and higher costs weighing down the industry. While, according to a recent article by the Economist, billion dollar hedge fund launches typically were viewed as commonplace in the past, current new offerings are generally much smaller and less frequent, causing serious implications for the industry and those seeking hedge fund jobs.
Smaller funds also tend suffer from reduced economies of scale. The article suggest that at a two percent fee rate, a $100 million hedge fund can expect to earn $2 million in a year, leaving little remaining after paying required salaries and bonuses. Larger funds can benefit from economies of scale as many compliance, accounting and legal costs tend to be fixed, rather than variable in comparison to assets under management.
Increased Compliance Costs Continue to Weigh on Hedge Funds
These increased compliance costs are a major factor weighing on the industry. The Economist article blames the Madoff scandal for the increased regulatory burden, but in fact, the reality goes much deeper. The overall financial industry is facing increasing compliance and regulatory costs as a result of public concerns over accountability following the financial crisis. Unfortunately for hedge funds, as some of the smallest players within the industry, the burden falls more harshly on organizations without considerable scale.
Fewer Financial Professionals are Leaving Big Institutions
In the wake of the financial crisis, restrictions on banks trading their own accounts increased. This resulted in many star traders being forced out of their positions at large institutions, with many deciding to start up new funds. This flow of financial professionals has slowed considerably now that the industry has largely completed that shakedown, which may contribute to the reduction in the number of new hedge fund ventures. A long track record of trading success is required in order to stake it out by oneself in the financial industry, and simply put, these individuals either have remained retained by their big firms or have already started their own hedge funds or wealth management practices.
What are the Implications for Hedge Fund Job Seekers?
The news of declining hedge fund launches on the surface seems like a negative trend for those seeking opportunities within the industry. With fewer players, it seems as though fewer opportunities would exist. In some cases, this may be true, but it doesn’t paint the entire picture. While there may be fewer players, the overall assets under management in the industry have largely remained intact, meaning many of the jobs that would have been required to manage funds in new firms are simply managing the funds in larger firms. The relationship may not be one to one due to those economies of scale, but the situation is certainly not as bleak as it may appear at first glance. Larger firms may also offer opportunities to lesser experienced individuals, whereas small shops require all team members to have a great depth and breadth of knowledge and experience.
Further, those increasing compliance costs generally reflect the salaries of skilled financial professionals hired into compliance-oriented roles, which represents a fast growing source of opportunities throughout the financial world. While on the surface the news of declining hedge fund launches may not seem positive, there are numerous opportunities if job seekers look beyond new start-ups.