It has been another tough year so far for hedge funds, which in the aggregate, stood in negative territory in May—down 0.09 percent. However, year-to-date figures are positive, with aggregate gains of 0.75 percent.
Interest Rate Uncertainty
The direction of the FOMC and its chair, Janet Yellen, is uncertain with respect to the timing of interest rate increases. Almost no one is suggesting the possibility of a return to zero, but the implementation date of a future rate increase is anything but clear.
Stock Market Remains Bullish
The extended bull market continues…to the detriment of the majority of hedge funds. Bull markets are historically problematic for hedge funds, representing an especially hostile environment for hedge funds pursuing equity and currency strategies. The 2009 – 2016 bull market is the second longest running of the post-war era, earning this spot near the end of April, 2016.
Exits and Brexits
The industry was rocked in Q2 with high profile redemptions by AIG, MetLife, and NYCERS. The Illinois State Board of Investment (ISBI) has voted to reduce its hedge fund investments by $1 billion and New Jersey’s pension agency is also contemplating cuts. The hedge fund industry’s high water mark of $3 trillion plus in assets under management continues to erode, having fallen to $2.86 trillion at last count.
The United Kingdom is poised to vote June 23, 2016, on the divisive issue of remaining in or exiting from the European Union. Polls suggest this will be a close vote and only the bookies are giving odds. If Britain leaves the EU, there will be political and economic consequences that will not only ripple across the pond, but around the globe. Hedge funds—gird your loins!
China’s Shrinking Footprint
China’s diminished GDP growth is reflected in a Yuan Renminbi valuation weaker than any seen since 2011. More troubling…a warning to China from the International Monetary Fund (IMF) regarding its mounting corporate debt, of which 55 percent is represented by state-owned enterprises.
Add Europe to the list of concerns because of its sluggish economic engine. While not as serious as China, it can be rapidly exacerbated by ongoing geopolitical threats manifested in the migrant crisis.
What about Hedge Fund Jobs?
Prospects are not as grim for hedge funds as one might conclude from the above litany of doom. Hedge funds are actually at their best when confronting adversity. Adversity was, after all, the very thing hedge funds were created to overcome.
According to the 2016 Hedge Fund Compensation Report, on average, less than 3 percent of hedge funds surveyed are planning a reduction in headcount and an average of 22 percent of firms surveyed are hiring.
Of course, events can always tip the scales. The Brexit, the FOMC’s rate decision, and sundry other variables that have not been discussed here, all have the potential to reshape the landscape. The important thing is to be prepared for any possible outcome.