The Clash hit of the same name topped the charts in 1982. More recently, it has become the de facto theme song of many an institutional investor. Of course, Clash did not have pension fund managers in mind when the group penned this tune, but it is descriptive of the dilemma these investors face. Should they stay the course with their hedge fund investments or follow the lead of those who have left for seemingly greener pastures.
The stock market has outperformed aggregate hedge fund gains in each year following the financial crisis. Lackluster performance, acting in concert with a punishing fee structure, is eroding the institutional investors’ will to stay the course. High profile exits by major players such as NYCERS, CalPERS and the Rhode Island State Investment Commission, make it difficult for those pension fund managers inclined to resist calls to exit hedge funds. It is an increasingly complex task for institutional investors to persuade the naysayers of the benefits of hedge fund investing.
The Argument for Staying
While it is true that equities have outperformed hedge funds in the years following the financial crisis (2009-present) if one were to gauge hedge fund performance over a longer period (2000-2016) the opposite would be true. Hedge funds outperform equities in this extended period.
The point being is that hedge fund performance can vary extensively depending on the period applied to the analysis. Couple this fact with the wide range of strategies hedge funds pursue and you begin to understand the importance of focusing on the role the asset is intended to play in one’s investment portfolio rather than zeroing in on period-dependent results.
Institutional investors face two major challenges. The first challenge is determining the appropriate role for the institution’s hedge fund investment within its broader portfolio of investments. Examples may include a willingness to accept greater risk in pursuit of gains or enhanced diversification.
The second challenge is twofold: 1) finding the appropriate strategy and, 2) finding the best-qualified manager to execute the chosen strategy.
Successful hedge funds will be those that make meeting these challenges effortless for potential investors.
What about Hedge Fund Jobs?
Hedge funds have an uphill battle in a bull market and this is the second longest running bull market in U.S. history. Add to this, the crushing weight of post financial crisis regulation and unprecedented meddling by the Fed (quantitative easing and persistent, record low interest rates). As a result, for the first time in recent memory, 2016 will likely see more hedge funds shuttered than opened.
To suggest that hedge fund jobs will be plentiful in such an environment would be ludicrous. However, the strongest hedge funds will survive and these survivors will flourish as never before, providing robust opportunities for those seeking a career in the hedge fund industry. In the short term, attrition will be painful but, long term, the industry will be stronger for it.