Having struggled with an indecisive and opaque Federal Open Market Committee, chaired by the enigmatic Janet Yellen since February 2014, hedge funds and the broader investment community must now consider the possibility that the Fed’s purchasing options may one day expand beyond U.S. Treasuries and agency securities.
The Interest Rate Debacle
Equity markets have plundered the phenomenon of interest rate uncertainty since the inception of Yellen’s tenure. This has been previously addressed here and, there is little value in re-hashing the point. Equities, arguably, have ridden these artificially low rates to the longest bull run since the June 1949 through August 1956 rally while concurrently decimating potential gains for hedge funds pursuing a long/short strategy. The market volatility fueled by rate uncertainty has been no friend to hedge funds.
Opening the Door a Crack
During Yellen’s September 28 testimony to Congress, Representative Mick Mulvaney, a Republican representing South Carolina’s Fifth District, quizzed the Chair on whether or not the Fed had ever considered buying equities?
This unusual question was apparently rooted in remarks the Chair had made during a speech in Jackson Hole, Wyoming in which she lamented the difficulties of providing adequate monetary policy. Yellen was no doubt referring to the brace of arrows currently in the FOMC quiver: 1) quantitative easing and 2) setting the Federal Funds interest rate.
Yellen goes on to say, “Accommodation may be somewhere in the future, down the line that this is the kind of thing that Congress might consider.” One may have thought the prospect of negative interest rates was frightening, but the prospect of the Fed purchasing equities might make one—well—quiver!
For those inclined to let this pass as nothing more than a polite response to Representative Mulvaney, it should be noted that the following day in a video Q&A, the gentle lady is quoted as saying, “the idea of expanding into areas like equities might be good thing to think about.”
One has to wonder if opening this door a crack is letting in a shaft of light or, merely a shaft that carries with it the potential to nationalize our markets.
In the wake of Mulvaney’s question and Yellen’s cryptic response, Larry Summer was cited by Bloomberg as saying that among the proposals on the table, buying a “wider range of assets on a sustained and continuing basis deserves serious consideration.” After speaking at a Bank of Japan lecture, he told reporters that, “I’m not prepared to make a policy recommendation at this point.”
How Does this Affect Hedge Fund Jobs?
At this point, it doesn’t. Everyone is keenly aware that the hedge fund industry is struggling with redemption and recognizes it has been haunted by performance issues for more than two years. For the first time in recent memory, hedge fund closures are outpacing new starts. Clearly, this environment is no Eden for hedge fund job seekers.
As a result, the industry is experiencing a fair amount of churn in the ranks of its employees. The opportunities that fade, due to problems in the hedge fund universe, also offer unexpected opportunities for those who maintain a solid network and an ear to the ground.