What Can Be Learned from 1st Quarter Hedge Fund Results?

Practically speaking, 2018’s first quarter hedge fund results are in the rear view mirror, and two trends are becoming clear.

First of all, HFRX Global Hedge Fund Index reported modest gains of 19 basis points through mid-March, which does not comprehend the latter half of March’s sharp drops in the Dow Jones Industrial Average. Moreover, the S&P 500 fell 1.2 percent by month-end, signaling the first quarterly loss in the index since 2015. Volatility has returned to the markets—with a vengeance!

The quarter was marked by market chaos as U.S. stocks plummeted, led by a previously generous tech sector, that saw Tesla tumble 5.1 percent due to production shortfalls and investor concerns regarding its autopilot technology. Amazon also took a hit after raising the ire of President Trump, who accused the company of taking unfair advantage of the U. S. Postal Service and paying nothing in the way of taxes. Then, to ice the cake, President Trump fully embraced the concept of a global trade war. In short, the trend for volatility through 2018 has been clearly established.

Secondly

Investors of all stripes are clearly nervous, as evidenced by the significant drop in ETF investment, coupled with a spike in first quarter trading volumes. Exchanges experienced a 10 percent year-over-year volume increase in March alone. Inflation fears are also a contributing factor, exacerbated by the recent rate hike promulgated by the FOMC.

What about Hedge Fund Jobs?

As dire as all the foregoing may sound, current events actually make hedge funds the most logical investment alternative for skittish investors. Hedge funds, especially those practicing long/short equity strategies, operate at a distinct disadvantage in stable markets. The so-called market chaos of 2018’s first quarter should be an environment in which such strategies thrive. Of course, they have not thrived, but that is because they have yet to make the necessary course corrections that volatility requires.

As 2018 matures, if necessary adjustments are made, hedge fund performance will reflect these changes by returning positive gains for investors. We have already seen hedge fund starts outpace hedge fund closures throughout the first quarter, suggesting investor demand.

Naturally, any net increase in the number of hedge fund firms will create job opportunities for aspiring hedge fund professionals.

Final Thoughts

Final performance figures are just a few days hence, but the HFRX strongly suggests that March will not be a banner month for hedge fund performance. That said, investors must come to the logical conclusion that the days of investing in an index fund with every confidence that gains will follow, are behind them. The return of market volatility has the potential to usher in a new era of hedge fund out performance. Hedge funds capable of making the appropriate adjustment to volatility, in concert with an intelligent marketing outreach, will reap the rewards.

The innovative culture that personifies the hedge fund industry is certain to rise to the occasion and hedge fund job opportunities will rise proportionately.

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