It is no secret on Wall Street that hedge fund returns haven’t been a source of excitement this year. In fact, hedge funds have struggled to post gains of only 4.6 percent to date, despite the S&P 500’s meteoric climb past 15 percent in the same span of time. While many would expect hedge fund managers to be concerned about their performance, Kevin Roose of New York Magazine reported that the atmosphere at the fifth annual SALT hedge fund conference remains upbeat. That’s because, even with the considerable under-performance to date and over the past few years, the hedge fund industry continues to earn high fees as well as attract large sums of new investment capital. Why is this?
It comes down to institutional investors, particularly pension funds, that aim for regular, consistent absolute returns every year, something equities cannot provide alone due to market volatility. In the past, these investors could diversify their portfolio using bonds, but the current interest rate environment isn’t providing sufficient levels of returns in order for the funds to meet their hurdle rates. So pension fund managers are looking for alternative asset classes that have characteristics similar to bonds, but offer higher returns. Some private equity strategies offer these types of returns, but more commonly, hedge funds are viewed as the answer. Hedge funds that employ market neutral strategies in particular that offer consistent, albeit lower, returns over time have seen a lot of attention from struggling pension portfolio managers.
In exchange for offering more management intensive strategies, hedge funds generally charge fees substantially higher than what one would see in an actively managed equity fund. Typically, this is done as a 2 percent fee upfront for assets under management and 20 percent cut of any profits the fund earns. While some would anticipate fees would come under pressure due to the low levels of returns, the industry isn’t really seeing any decline in their revenues.
“I keep waiting for fees to go down, but they’re only going up,” Jan Buchan, a hedge fund industry veteran, told Roose at the conference.
This view is consistent with the results observed amongst leading funds. For example, John Paulson, who has lost $9.4 billion over the past two years for his clients, is still charging his regular fees. In fact, he’s still attracting investors. As an overall industry, hedge funds took in $817 million in new investor capital in April 2013 alone. There certainly isn’t a great deal of pressure on this group of fund managers, despite less than stellar returns.
What are the Implications for Hedge Fund Job Seekers?
As a result of stable fees, hedge funds have been able to offer more stable opportunities than their financial industry peers in investment banking or asset management. While there has been some pressure on the regulatory front that has increased expenses, along with jurisdictional questions for some funds, hedge fund employees have largely been able to rely on their employment more than their peers. This should continue into the foreseeable future, as long as interest rates remain low and hedge funds are positioned as one of the most attractive alternatives to the fixed income asset class.