From the category archives:

Hedge Fund News

Hedge funds have long dominated the alternative asset class, both in terms of assets under management(AUM), and also in sheer numbers of firms. As reported by Prequin, hedge fund AUM reached a record high of $3.61 trillion through the first half of 2018.

However, again according to Prequin, the alternate asset universe was around $8.8 trillion at the end of 2017 and, although the hedge fund industry has a generous slice of the piewho has the rest?

The Alternative Asset Pie

Alternative assets are broadly defined as any investment that is not a stock, bond, or certificate. The primary alternative assets are hedge funds, private equity, venture capital, real estate, infrastructure, private debt and natural resources.

Arguably, hedge funds lead the list in terms of assets under management. However, private equity firms are challenging the hedge fund industry for its crown. Private equity assets under management currently stand at $3.1 trillion, an uncomfortably close second place. The alternative investment universe is expected to reach $14 trillion by the end of 2023.

If alternative assets under management do reach $14 trillion by 2023, which asset class is likely to capture the $5.2 trillion up for grabs?

What Institutional Investors Are Saying

Prequin’s Investor Outlook: Alternative Assets H1 2018 suggests that private equity firms may hold an advantage. For example, institutional investors’ general perception of private equity is 3 times more positive than is their perception of hedge funds. Moreover, institutional investors’ long term plans signal a fading enthusiasm for hedge fund investment. One in four report they plan to reduce hedge fund investment, while one in five are entertaining an increase in investment.

In sharp contrast, only one in twenty-five institutional investors plan to reduce their private equity investment, while one two plan to increase their investment in private equity.

But Wait…

Pitchbook, viewed by many as the doyen of private equity, casts doubt on the ability of private equity to dethrone hedge funds. In their Global PE & VC Fund Performance Report, Pitchbook acknowledges the difficulties private equity firms have had in beating the markets over the last decade, with only 2013 being a year in which at least on-half of private equity firms beat the market…and just barely, at that.

What about Hedge Fund Jobs?

Hedge fund job seekers should focus on the positive. If the next 5 years sees an inflow of capital in the $5 trillion range, roughly $1 trillion annually, the hedge fund industry is certainly going to see its share of that inflow.

How much of that flows to hedge funds is up for debate. However, the industry’s closest competitor, private equity, isn’t as well poised to claw in the lion’s share as some would like us to believe. Even if projections are correct, hedge fund assets under management will grow to $4.7 trillion by 2023. This level of growth, even in the most dismal of scenarios, bodes well for growth in hedge fund jobs. If the current crop of hedge fund professionals can improve performance levels, the future will be even brighter.

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Here we are, well into the final quarter of 2018, and the hedge fund industry is having something far short of a spectacular year. According to eVestment, aggregate September global hedge fund returns dipped into the negative, with aggregate industry returns of -0.17 percent, bringing year-to-date gains to 0.53 percent, a far cry from the 7-plus percent 2018 gains investors were anticipating in the waning days of 2017.

Whose Fault Is This?

In a fascinating Barron’s article, dated October 5, 2018, the author seems to absolve the hedge fund industry of blame, suggesting that, “Surviving in the future requires that active managers go back to that past and take a more hedge fund–like approach.” The article was speaking broadly to the asset management industry, and this compliment to hedge funds, however left-handed, was extraordinary, given the dismal gains the industry has achieved this year.

The fact is, the hedge fund industry has faced 3 lethal forces, 1) a rampant U.S. bull market, and 2) an S&P 500 Index that is up 8 percent year-to-date, through September, and 3) a rapid economic expansion that central banks have reacted to by increasing interest rates. As a result, hedge funds have recorded their slowest growth in 3 years as of 2018 Q3.

Compounding the problem, is the fact that the hedge fund industry is measured against an inappropriate yardstick…the S&P 500. However unrealistic this may be, it is the de facto benchmark for the industry. Of course, an investment in a hedge fund is not comparable to an investment in the broader stock market, but the financial media continues with comparisons to the S&P 500. Let’s be frank, many investment vehicles fail to compare favorably with the S&P 500, including bonds, private equity and venture capital, to name a few.

There Are Positives

Prequin reports that hedge fund assets under management reached an all-time high of $3.61 trillion by the end of 2018’s first half. Moreover, North America had the distinction of being the sole region to generate net inflows through June 2018inflows totaling $22 billion, and fully 42 percent of North American based fund managers experienced those inflows.

Another positive is the fact that hedge funds are closing at a significantly lower rate. Hedge Fund Research (HFR) reports that hedge fund closures have been declining since 2017—for example, 125 funds were shuttered during 2018 Q2, while 2017 Q2 saw 222 hedge fund closures, a 44 percent decrease in year-over-year closures.

What about Hedge Fund Jobs?

Clearly, investors are not abandoning hedge funds. The absence of significant outflows and the organic increase in assets under management (record level) demonstrate that hedge funds are getting it done. Add in the net increase in the number of hedge fund firms and you have a favorable scenario for job opportunities in the industry, and particularly if you are job hunting in North America-based firms. As we stated earlier, 42 percent of North American based fund managers experienced capital inflows, and growth also means jobs.

While it is true that, in the aggregate, the industry is not enjoying its finest hour, there is no question that the industry is not only surviving, but thriving…in spite of what the talking heads would have you believe.

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Will Stock Pickers Survive this Brave New World?

July 23, 2018

Several events, which occurred just this month, should have stock pickers quaking in their Salvatore Ferragamo’s. According to the July 11, 2018, edition of the Financial Times, Facebook faces its first ever fine, which is a result of the Cambridge Analytica data scandal. Regulators in the United Kingdom’s Information Commissioner’s Office (ICO) accused Zuckerberg’s company […]

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Great Results Depend Upon Superior Hedge Fund Talent

July 9, 2018

Ten days into the second half of 2018, what are the prospects for a banner year in the hedge fund industry? After all, unemployment is at record lows, optimism for the manufacturing sector is at an all time high, and market volatility has increased, which traditionally provides an edge to hedge funds, yet HFR reports […]

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Is this the First Hedge Fund “Man Bites Dog” Story?

June 25, 2018

Hedge Funds, long the whipping boy for the financial ills of the country, are witnessing one of their own grow a spine. Last Wednesday, Davidson Kempner Capital Management LP, politely informed Kentucky Retirement Systems (KRS) to withdraw the $68 million it has invested with the firm. Why? According to the statement given to the Lexington […]

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First Quarter Results Mean an Uphill Battle for Hedge Funds

April 30, 2018

Hedge funds were dealt a harsh hand in the first quarter of 2018, down 0.13 percent. However, to put things in perspective, the Dow was down 2.49 percent in its first quarter, ending at 24,719 the closing number for 2017, and falling more than 600 points to 24,103 on March 29, 2018, the last trading […]

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What Can Be Learned from 1st Quarter Hedge Fund Results?

April 3, 2018

Practically speaking, 2018’s first quarter hedge fund results are in the rear view mirror, and two trends are becoming clear. First of all, HFRX Global Hedge Fund Index reported modest gains of 19 basis points through mid-March, which does not comprehend the latter half of March’s sharp drops in the Dow Jones Industrial Average. Moreover, […]

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