At 9:35 AM Monday 24 August 2015, even the stunning 1089.42 peak market drop was insufficient to signal the end of the current bull market. As previously discussed here, the DJIA would need to plunge to 14,681.12 to mark the official end.
The fact that the market is rebounding as this post was being written suggests the bull still has some run left, but hedge fund investors want to know if the strategies they’ve bought into will preserve their capital and offer them some reasonable gains. Hedge fund returns have been dogged by comparisons to S&P 500 returns but that ship has sailed in the wake of recent market losses.
Fed Rate Hike
A hike in the fed funds rate would almost certainly create additional market woes, opening a new range of options for investors. However, the prospect of an FOMC decision in favor of a September rate hike is diminished by the current volatility we are seeing in the stock market and by other significant events. Unlike U.S. markets, China has experienced no similar rebounds. In fact Asian markets are weak across the board.
Other factors include the continued decline of the middle class, the failure of household income to rebound, understated unemployment, new lows for oil, North Korea’s saber rattling, Assad’s use of SARIN gas on civilians in Damascus, the doubts surrounding the approval of the Iranian nuclear deal and the general malaise in the global economy. These represent a few of many issues which must be considered before Janet Yellen announces a hike in the fed funds rate.
Most experts agree that a rate hike would result in at least a modest market sell-off. Is this something the FOMC would like to see on the heels of the recent market declines? Probably not. After all, a rise in rates would send a signal that the FOMC is content with the direction of employment and GDP growth, yet concerned with rapid wage hikes and inflationary pressures.
Additionally, the FOMC is keenly aware of under-employment numbers, cognizant of the less than robust growth in GDP, understands that inflation is below the 2% trigger and must acknowledge that wages are at best, stagnant. In short, none of the criteria the Fed Chair has publicly stated will be required to trigger a rate hike has been met.
The decision to hike or not to hike will be a test of the integrity of Janet Yellen and her FOMC.
A Test for Hedge Funds
It is exactly this environment that offers the potential for hedge funds to demonstrate their intrinsic value and silence the critics, if not forever, certainly for some time to come. The S&P 500 is in the red year-to-date. U.S. markets are moving in both directions instead of one and hedge funds were born to thrive in just these circumstances.
What This Means for Hedge Fund Jobs
In the short-term, job opportunities in the hedge fund industry will remain flat. However, if hedge funds navigate these troubled waters effectively and profitably, hedge funds should reap an influx of investment dollars. Such an influx would improve employment opportunities in the industry.