Is the Hedge Fund Industry Facing an Existential Threat?

Hedge Fund Research (HFR) reported an asset weighted composite index of -2.71 percent for the month of October, bringing the year-to-date asset weighted composite index to -0.98 percent, and HFR, in mid-November, is reporting continued declines, which suggest that November will also be in negative territory.

As a result, many media outlets are, once again, forecasting the demise of the hedge fund industry.

Are Hedge Funds in a Death Spiral?

The short answer is, no! However, one can make a reasonable argument that the industry is at an inflection point. As of November 23 2018, the S&P 500 was down 2.35 percent for the year and the Dow Jones Industrial Average was in the red as well, down by 2.17 percent, while hedge funds were down 2.71 percent.

It is therefor, fair to say, that hedge funds have fared no worse than the broader markets. At the same time, the hedge fund industry needs to recognize that performance results, which mirror the broader market, are not what investors signed up for.

Hedge fund firms must innovative new and improved investment solutions to attract the investment community. Additionally, hedge fund firms must learn to constrain themselves and project, in fact and in perception, the ability to reign themselves in from irresponsible investments. Moreover, the hedge fund industry must do a better job of keeping pace with the rise of artificial intelligence and other technological changes.

These and other changes are persuading many hedge fund firms to engage in some serious introspection, from the manner in which they serve their investors, to building a business that does not rely on the bespoke talents of its founder.

Key Issues Facing Hedge Funds

First and foremost, the hedge fund industry must determine a course of action which allows them to maintain their value to potential and existing investors.

Secondly, the industry needs to understand, identify and react quickly to external forces of disruption and global mega-trends.

Lastly, and most importantly for our readers, hedge fund firms need to alter their structure in a manner that allows them to remain relevant, not only to investors, but also the workforce of the future.

What about Hedge Fund Jobs?

Of the key issues mentioned above, relevance to the workforce of the future will be the subject of this section.

Expect to see a hiring shift toward hiring people with robust mathematical backgrounds. Be aware that any such hires will need to work effectively with existing staff who have a strong fundamental knowledge of finance and investing. This factor is crucial to the expansion of quantamental hedge fund firms. With this shift, a hedge fund’s search for talent comes into direct competition with the technology sector.

To be successful in this competition, hedge fund firms will need to look more like Silicon Valley. To accomplish this, they must foster internal collaboration and diversity in their workforce, as well as reinvent how they deploy and retain talent.

This bodes well for jobs in the hedge fund industry, which is not facing an existential threat, but rather a metamorphosis.

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