What Is Going On with the Hedge Fund Industry?

Here we are, well into the final quarter of 2018, and the hedge fund industry is having something far short of a spectacular year. According to eVestment, aggregate September global hedge fund returns dipped into the negative, with aggregate industry returns of -0.17 percent, bringing year-to-date gains to 0.53 percent, a far cry from the 7-plus percent 2018 gains investors were anticipating in the waning days of 2017.

Whose Fault Is This?

In a fascinating Barron’s article, dated October 5, 2018, the author seems to absolve the hedge fund industry of blame, suggesting that, “Surviving in the future requires that active managers go back to that past and take a more hedge fund–like approach.” The article was speaking broadly to the asset management industry, and this compliment to hedge funds, however left-handed, was extraordinary, given the dismal gains the industry has achieved this year.

The fact is, the hedge fund industry has faced 3 lethal forces, 1) a rampant U.S. bull market, and 2) an S&P 500 Index that is up 8 percent year-to-date, through September, and 3) a rapid economic expansion that central banks have reacted to by increasing interest rates. As a result, hedge funds have recorded their slowest growth in 3 years as of 2018 Q3.

Compounding the problem, is the fact that the hedge fund industry is measured against an inappropriate yardstick…the S&P 500. However unrealistic this may be, it is the de facto benchmark for the industry. Of course, an investment in a hedge fund is not comparable to an investment in the broader stock market, but the financial media continues with comparisons to the S&P 500. Let’s be frank, many investment vehicles fail to compare favorably with the S&P 500, including bonds, private equity and venture capital, to name a few.

There Are Positives

Prequin reports that hedge fund assets under management reached an all-time high of $3.61 trillion by the end of 2018’s first half. Moreover, North America had the distinction of being the sole region to generate net inflows through June 2018inflows totaling $22 billion, and fully 42 percent of North American based fund managers experienced those inflows.

Another positive is the fact that hedge funds are closing at a significantly lower rate. Hedge Fund Research (HFR) reports that hedge fund closures have been declining since 2017—for example, 125 funds were shuttered during 2018 Q2, while 2017 Q2 saw 222 hedge fund closures, a 44 percent decrease in year-over-year closures.

What about Hedge Fund Jobs?

Clearly, investors are not abandoning hedge funds. The absence of significant outflows and the organic increase in assets under management (record level) demonstrate that hedge funds are getting it done. Add in the net increase in the number of hedge fund firms and you have a favorable scenario for job opportunities in the industry, and particularly if you are job hunting in North America-based firms. As we stated earlier, 42 percent of North American based fund managers experienced capital inflows, and growth also means jobs.

While it is true that, in the aggregate, the industry is not enjoying its finest hour, there is no question that the industry is not only surviving, but thriving…in spite of what the talking heads would have you believe.

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