From the category archives:

Hedge Fund Jobs

Hedge funds posted an aggregate 2.3 percent gain through the first quarter, which marks the strongest start for the industry since 2013. Long/short equity strategies lead the pack with composite returns of 3.2 percent.

Back to Reality

At first blush, this sounds terrific but, realistically, the industry is beating a very low bar—its own performance record. The unvarnished truth is that hedge fund performance continues to compare poorly to the S&P 500 Index, which returned 6.1 percent in the same period, almost three times hedge funds’ aggregate gains. Even the wildly successful long/short strategies posted gains that represent only about one-half the S&P 500 gains.

According to Prequin, the quarter breaks down as follows: January saw gains of 1.46 percent, followed by February gains of 1.01 percent and ending with March gains of 0.68 percent, which totals 3.15 percent, a more generous result than the 2.3 percent reported by eVestment. Regardless of the disparity, one thing is clear, the direction is wrong with gains diminishing each month during the first quarter.

Cause for Concern?

Actively managed funds of all stripes are under pressure. Blackrock’s actively managed equity portfolio lost $42 billion between 2013 and 2016. More broadly, actively managed equities lost $442 billion in the past twelve months as $542 billion flowed into passively managed index funds, representing a nearly trillion-dollar shift.

Hedge funds have seemingly countered by adopting an “if you can’t beat ‘em, join ‘em” strategy. Hedge fund investment in ETFs have surged 77 percent, rising to $43.7 billion while the actual number of hedge funds investing in ETFs have risen by 17 percent, this according to Deutsche Bank’s 2016 Guide to Institutional ETF Ownership.

One can’t help but be concerned about the motives behind hedge fund investment in what is arguably a rival investment vehicle—an investment vehicle that has attracted $1.44 trillion from about 3,500 institutional investors, representing 59 percent of EFT assets.

What Is the Answer?

Hedge funds do not invest in EFTs as a core asset building block. Rather, such investment provides quick, efficient asset class access and to provide liquidity. This liquidity can then be leveraged to provide the fund with the ability to execute large trades without significant market impact. In short, hedge funds use ETFs as completion strategies, as tangible satellite positions, for cash management, for liquidity access, and risk management.

In the hedge fund industry tradition of innovation, hedge funds are using ETFs to their greatest advantage.

What is the Relevance to Hedge Fund Jobs?

The Deutsche Bank report offers palpable evidence that hedge fund investment in EFTs is on the rise. It follows that individuals with a background in ETFs may have just the credentials required by hedge funds exploiting ETFs for the purposes outlined above.

More to the point, it is instructive to learn that the spirit of innovation is an important attribute for anyone that seeks a position in the hedge fund industry. How “outside the box” is a strategy that sees hedge funds investing in a competitor?

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The suggestion that assets under management are soaring is admittedly a bit Trumpian, but the fact is that the number of hedge funds shrank to 9,803 (including funds of funds) while 2016 industry assets under management climbed to just over $3 trillion according to the HFR Market Microstructure Report.

What Can Be Inferred From the Report?

If the number of hedge funds is shrinking at the same time hedge fund assets under management (AUM) rise, then it stands to reason that those firms remaining are becoming larger. More dollars spread among fewer firms can result in no other outcome.

In January 2017, hedge fund redemption slowed to $5.2 billion, a figure that represents about one-quarter of the outflows suffered in January 2016. Suffered may not be the correct adjective because we must also infer that many of these redeemed funds are being redirected to hedge funds with superior performance metrics. Otherwise, how is the growth of AUM to be rationalized?

How Will This Affect Hedge Fund Compensation?

For insights into the effect of larger firms on hedge fund compensation, we look to the 2017 Hedge Fund Compensation Report.

2016 HF Comp by Firm Size

 As the chart shows, mean compensation begins to trend lower in larger firms, those with fifty or more employees. One can expect investors to redeem from firms that have failed to meet expectations and invest in higher performing firms. However, that does not mean that these investment dollars will necessarily flow to the largest firms. Countless hedge fund firms, with fewer than fifty employees, boast stellar performance records. As a result, they will attract their share of investors.

Nonetheless, as underperformers shutter and the total number of hedge fund firms continues to decrease, the growth of even the smallest firms is all but guaranteed. If the trend toward lower compensation in larger firms, as shown in the chart above, were to continue, then it would be reasonable to speculate that hedge fund compensation overall will undergo a decline.

There are too many factors in play which could impact the industry, therefore it would be irrational to predict this outcome since we know the paradigm in which the above chart exists may be radically different from tomorrow’s.

What Is the Impact on Jobs?

We all understand that swings in assets under management do not necessarily mandate adjustments in staffing, but those who lose their positions because of firm closure could face increased challenges in their quest to gain purchase with another firm.

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Surprisingly Investors Remain Bullish on Hedge Funds

March 5, 2017

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 […]

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Hedge Funds Face-Off with the 4 Horsemen of the Apocalypse

May 31, 2016

Who are these four horsemen? Pitiful performance, available alternatives, reduced fees, and impatient investors. Abysmal hedge fund performance has been the norm for the past five years. Hedge Fund Research reported the global hedge fund composite to be down almost 1.2 percent when averaged over the past five years. Contrast this with the S&P 500, which is up […]

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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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What Is the Best Professional Background for a Hedge Fund Job?

January 4, 2016

Many aspiring to a career in the hedge fund industry ask this question in the broader context of career path. It is an excellent question but, like so many others, has no single answer. The truth is there are many paths to a career in hedge funds. Hedge fund employees come from a multiplicity of […]

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Competition for Hedge Fund Jobs Heats Up

November 30, 2015

Hedge fund performance tends to suffer in a bull market and the current bull market is on the cusp of moving into second place for longevity, unseating the 1949 through 1956 run, which currently holds that distinction. The bull market has taken the lion’s share of the blame for the havoc wreaked on hedge fund […]

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