From the category archives:

Hedge Fund Careers

After an inglorious 2016, many pundits jawbone about a continued investor exodus from the so-called overpriced and underperforming hedge fund industry. However, the facts are in stark contrast to the rhetoric. January 2017 redemptions total $5.2 billion, about one-quarter of the $19.3 billion outflow the hedge fund industry experienced in January 2016. Furthermore, a substantial percentage of the monies redeemed were reinvested in hedge funds with superior performance records. We know this to be true, because year over year hedge fund AUM continues to rise, and presently stands at $3.018 trillion.

Painting the hedge fund industry as being in a death spiral is like saying the sun will burn out in 5 billion years. Undeniably, a number of hedge funds are underperforming—a small number will fail, but this has always been so.

Credit Suisse Delivers Positive News

In its ninth annual Hedge Fund Investors Survey, 87 percent of 320 institutional investors representing $1.3 trillion in hedge fund investments, indicated they would maintain or increase their hedge fund exposure in 2017…this is the same percentage reported in Credit Suisse’s 2016 survey.

Some of this willingness to stay the course may be attributed to the fact that 57 percent of these investors reported receiving fee reductions in the past twelve months. Additionally, 61 percent of the survey’s respondents reported having at least one manager in their portfolio with a hurdle rate. This confirms a trend between investors and hedge fund managers in which they continue to achieve a better alignment of terms.

What Drives Redemption?

As one might expect, the main driver of redemption, according to 80 percent of survey participants, is underperformance. Fifty-two percent of respondents cited strategy drift and individual investment manager turnover as drivers.

Interestingly, just 30 percent of the survey’s respondents felt that their hedge fund met or exceeded expectations, a 15 percentage point reduction from last year’s 45 percent. This is worrisome. Either expectations are elevated or hedge funds are performing more poorly. The aggregate gains for hedge funds in 2016 as compared to 2015 would suggest the former, not the latter.

What Are Investors Looking for In a Hedge Fund?

Investors surveyed are looking for returns net of fees, non-correlation with existing investments and core team stability coupled with proven risk management skills, in that order.

The Forecast Is Growth

While the Credit Suisse survey is replete with insights, the most heartening takeaway is investors predict a 3.5% increase in inflows during 2017. If this materializes, we will see hedge fund AUM rise by around $106 billion at year-end.

Hedge Fund Jobs

The Credit Suisse survey is great news for those seeking employment in the hedge fund industry. Growth will certainly enhance demand. The survey indicates that the most sought after hedge fund strategies are Global Macro-Discretionary, with 26 percent of those surveyed indicating a preference for this strategy, followed by 18 percent opting for Fixed Income Arbitrage/Relative Value and another 18 percent favoring an Emerging Markets-Equity strategy. It follows that employment opportunities will be greater in firms following one of these three strategies.

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It appears that the hedge fund industry, on average, will end 2016 on the wrong side of the S&P 500, the arbitrary benchmark, which in the eyes of many, heralds a successful level of performance. The S&P 500 is up some 10.5 percent year-to-date, while average aggregate hedge fund gains hover around 4.5 percent.

Another Year of Mediocrity

One can debate the merits of using the S&P 500 as a benchmark for hedge fund performance, but no matter how persuasive the argument, the fact is that many hedge fund firms are disappointing their investors. This is irrefutable, borne out by -$77 billion in net outflows through October 2016. This is the first time in recent memory that, taken together, hedge funds will experience negative annual growth in assets under management. Another unpleasant fact is that hedge fund closures have outpaced hedge fund starts in 2016.

Investor Backlash

After eight consecutive years of underperforming any number of broad market indices, investors are saying, enough is enough. Major insurers such as MetLife and AIG cut back their hedge fund investments in a substantial way. Public pension funds also expressed their dissatisfaction with massive redemptions. Underperformance wasn’t the only issue that irked insurers, public pension funds and other investors; it was that they were paying excessively for the privilege. Hedge fund fees have always drawn fierce criticism, but the combination of high fees, poor returns and/or losses, became a burden too heavy to bear for a significant swath of investors.

Winners and Losers

In all human endeavors, there are winners and losers. The hedge fund industry is no exception. Average returns in the industry are lackluster, but some hedge funds that have managed to exceed the S&P 500’s gains by two, three, and fourfold. For example, Cheyne Capital’s Total Return Credit Fund was up almost 43 percent for the year through October. It is reported that at least one-half of more than 11,000 hedge funds are in positive territory, if not up to the gains enjoyed by the S&P 500.

Hedge fund investment is not a spectator sport. The Chicago Cubs enjoyed a fan base that remained loyal to the franchise for generations. These fans were finally rewarded with a World Series victory after 108 years. Unlike Cubs fans, investors expect hedge funds, and their managers to produce wins each year.

It is realistic to speculate that the number of hedge funds will continue to decline if poor performance continues to be coupled with high fees.

Hedge Fund Jobs

The shrinking numbers of hedge fund firms do not necessarily signal a shortage of hedge fund jobs. While it is true that a percentage of this capital has fled the hedge fund industry for other opportunities, much of it has been reinvested into higher performing firms. As these firms swell their assets under management, they will likely be reaching out for the talent necessary to meet their obligations to their investors. Rather than despair, recognize that this is capitalism at its best. In a capitalistic economy, only the strongest performers survive and survive they will. So hone your skills, improve your network and redouble your job seeking efforts.

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I Got the Offer – Now What?

November 14, 2016

Everyone that breaks into the hedge fund industry asks themselves that question. The education, the experience, the network of contacts, the untold hours spent writing and re-writing resumes/CVs and cover letters, interviews – it ultimately ends with the negotiation of a compensation package. Prior to the finalization of this key hiring element all one has […]

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Hedge Funds Suffer 3 Consecutive Quarters of Net Outflows

August 8, 2016

If the subject were recession, defined by the media as two or more consecutive quarters of decline, then one would correctly view the past three quarters of declining hedge fund assets under management as akin to a recession in the hedge fund industry. However, economists can find no common ground for defining a recession. Obviously, […]

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Are Hedge Funds Truly Failing to Attract Graduating MBAs?

July 25, 2016

While it may be true that fewer MBA holders are entering the hedge fund industry, it is certainly true that recent headlines suggesting that these students “scorn” hedge funds or that fewer MBAs “want to work” for a hedge fund border on fiction. Here Are the Facts The articles referenced above are inspired by Training […]

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The Goldilocks Principle and Your Hedge Fund Career

March 7, 2016

The Goldilocks principle states that something must fall within certain margins, as opposed to reaching extremes. As such, it is often associated with the search for life on other planets and explains the phenomenon of life here on planet Earth. In short, life is possible because Earth is neither too hot nor too cold, nor is […]

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Trump Defies Gravity and So Do Hedge Funds

February 22, 2016

Anyone following the primaries will recognize this phrase, used frequently in the context of Donald Trump’s foray into presidential politics. For example, in the recent South Carolina contest, the phrase was employed ubiquitously by talking heads in the mainstream media, who were largely incredulous regarding the margin of Trump’s victory in the wake of his […]

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