From the category archives:

Hedge Fund News

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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On February 3, 2017, President Trump signed an executive order that outlined his administration’s core principles for regulating the U.S. financial system. They are:

(a) empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth;

(b) prevent taxpayer-funded bailouts;

(c) foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry;

(d) enable American companies to be competitive with foreign firms in domestic and foreign markets;

(e) advance American interests in international financial regulatory negotiations and meetings;

(f) make regulation efficient, effective, and appropriately tailored; and

(g) restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.

Empower Americans

It is difficult to make a case against allowing Americans to make independent financial decisions based on informed choices, saving for retirement and pursuing individual wealth. This principle is closely linked to the broadened definition of an accredited investor, which failed to make it through the lame duck Congress and awaits action by the 115th United States Congress. There is little doubt that the proposed definition, which is more inclusive, would broaden the market of potential hedge fund investors.

Prevent Taxpayer Bailouts

There is only one federal bailout of a hedge fund on record—the bailout of Long-Term Capital Management (LTCM) in September 1998. It is fair to say that the hedge fund industry shares similar views on government bailouts as those shared by Americans in general. In short, the Trump stance on taxpayer bailouts is neither help nor hindrance to the hedge fund industry.

Foster Economic Growth

Promoting economic growth and vibrant markets based on a regulatory philosophy that targets systemic risk and market failure is music to the ears of the hedge fund industry. Current regulatory efforts are a “gotcha” cat and mouse game that serves no one’s best interests. While this is core principle lets no one off the hook, it does remove regulatory uncertainty and hold the promise of an end to “gotcha” regulation.

American Competitiveness

Hedge funds are wary of this, not because they disagree with the premise, but because the means of achieving this end are unspecified. The potential for trade wars and isolationism are real and concerning to the majority of hedge funds.

Advance American Interests

Again, no one decries the premise; the means by which this end is achieved is the over-riding concern for the industry.

Efficient, Effective and Appropriate Regulation

Hedge fund managers would like nothing more than efficient, effective and appropriately tailored regulation. The single greatest expense for any hedge fund is the expense associated with compliance. If this core principle is realized, hedge funds and their investors will benefit substantially.

Restore Public Accountability

This, the last of Trump’s eight core principles, will likely be the most difficult to achieve. Federal financial regulators are accustomed to their pedestal. They will vigorously resist being toppled from it. The transparency they demand from those they regulate is unlikely to be reciprocated. However, if achieved, it will accrue to the benefit of the hedge fund industry.

Hedge Fund Jobs

Empowered Americans, fostering economic growth and competition, while advancing American interests abroad, coupled with efficient, effective and appropriately targeted regulation and public accountability for the financial regulators bodes well for the hedge fund industry’s success. This success will necessarily be accompanied by increased employment opportunities in the hedge fund industry.

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Little Rhode Island Delivers Devastating Blow to Hedge Funds

October 31, 2016

According to a recent article published in FINtech, the Rhode Island State Investment Commission has announced its decision to redeem $534 billion invested in seven hedge funds. This enormous sum does not include the $51 billion it plans to redeem from Viking Global. This reduces Rhode Island’s exposure in Viking Global by 50 percent and […]

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Who Will Make the Hedge Fund Industry Great Again?

October 17, 2016

Trump’s theme, “Make America Great Again,” has drawn its fair share of criticism. On the one hand, the slogan is interpreted as a slight by those who believe America is already great. On the other hand, many voters believe that America’s greatness is diminished and needs restoration. Parallels exist in the hedge fund industry. A […]

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Have Hedge Funds Arrived at a Crossroads?

September 5, 2016

When Paul Tudor Jones says adieu to roughly 60 employees, Pershing Square Capital Management shaves its staff by 10 percent and Citadel trims its headcount by more than a dozen souls, this is a fair question to ask. After all, these are some of the largest and, most successful, names in the industry. What’s Driving […]

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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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Why Do Hedge Funds Continue to Under Perform?

July 11, 2016

This is a top-of-mind question for institutional investors and the answers are as varied as the hedge fund industry. Obviously, the answers offered can’t all be accurate. Furthermore, answers will necessarily differ from one fund strategy to another. Morgan Stanley conducted a survey at a recent conference of long/short fundamental equity hedge funds. Morgan Stanley’s […]

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