Why Are Institutional Investors Sticking with Hedge Funds?

Although 2018 hedge fund industry performance was its worst in nearly a decade, the majority of institutional investors surveyed in a recent Prequin report, expect to maintain or increase hedge fund allocations.

 

One might reasonably expect that on the heels of 2018’s collective 3.41 percent loss, institutional investors would turn their attentions elsewhere, and some will. However, a clear majority (79 percent, according to Prequin) has opted to place their bets on hedge funds, and plan to maintain and/or increase their allocations.

 

Isn’t that Counterintuitive?

 

Not really. Consider this oft repeated phrase, “past performance may not be indicative of future results.” When we read this phrase in a prospectus, for example, human nature leads us to assume that the performance of the investment in question may deteriorate. However, is it not equally possible that it will improve?

 

One astonishing example of such improvement is illustrated by Ray Dalio’s Dark Horse Pure Alpha fund, which having returned 1.2 percent in 2017, closed out 2018 with a jaw-dropping 15 percent gain. Past performance was no indication of this happy result!

 

Many of those responsible for allocations, believe that this decade long expansion is rife with bloated asset valuations and flagging economic growth, both of which are being exacerbated by growing protectionism and trade wars.

 

The natural outgrowth of such a pessimistic view is hedge fund investment. Although no one can know with certainty where we are in cyclical economic and market environments, it is no less clear that the environment is undergoing a shift. In such an uncertain climate, institutional investors are turning to hedge funds—not counterintuitive at all!

 

This is why 79 percent of institutional investors polled in Prequin’s report, the largest contingent of investors since 2014, plan to maintain or increase their hedge fund allocations in the coming months.

 

Since the Financial Crisis

 

The hedge fund industry has seen its obituary written multiple times since the financial crisis and, to be sure, the industry as a whole has seen some dark times since 2008. However, hedge funds continue to innovate, explore new strategies, and adopt new technologies. As a result, we are still here; we are still growing; and we remain relevant. Like Mark Twain’s death, the reports of the hedge fund industry’s demise have been highly exaggerated.

 

What about Hedge Fund Jobs?

 

Crypto-currencies, artificial intelligence, machine learning, big data, algorithms, block-chain technology and quants; these are terms that would not be heard in the same breath with hedge funds less than a decade ago. However, it is difficult to find a hedge fund news article today that does not contain at least one of these terms.

 

This speaks volumes to brighter prospects for hedge fund job seekers. Skills, talents and educational backgrounds once far removed from any relevance to a hedge fund firm are now integral to its daily operation.

 

As business cycles ebb and flow, and markets wax and wane, the hedge fund industry will be along for the ride, innovating and adapting as it has since the beginning. Demand for hedge fund jobs will continue to grow, to meet the changing needs of our evolving industry.

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