From the category archives:

Hedge Fund News

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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In Alpha Calling’s previous article, Hedge Funds: A Positive Perspective on 2018, the timing of its publication was such that a definitive conclusion on year-end hedge fund industry performance could not be reached, as the conclusion required access to yet unpublished HFR data for Q4. Moreover, it would have been inappropriate to use another source inasmuch as HFR was used as the data source throughout the first 11 months of analysis. However, we now have that data. Just as predicted, the HFR asset weighted composite index came in negative, to be precise, -0.68 percent, bringing year-to-date aggregate hedge fund losses to -0.84 percent. This compares very favorably to the S&P 500’s year end result, which found that index down -6.24 percent.

Index Definitions

Careful readers may have noticed that the basis of the analysis is the HFR asset weighted composite index as opposed to the HFR fund weighted composite index. Hedge Fund Research (HFR) data was employed for this brief analysis, largely because Hedge Fund Research is regarded as the doyen of the hedge fund industry.

The HFR asset weighted composite index was used, as opposed to the HFR fund weighted composite index because it offers the fairest overview of industry performance. Per HFR, “the constituent funds of the HFRI Asset Weighted Composite Index are weighted according to the AUM reported by each fund for the prior month.” Careful observers will note that most media outlets choose the HFR fund weighted composite index as a reference point. Readers may draw their own conclusions as to why this is so. Also, it should be noted that neither index includes funds of funds.

HFR sports a variety of indices. Anyone interested in exploring their definitions can find them here.

Relative Performance

Alright—2018 ended in the red for the hedge fund industry as a whole—we get that. As has been stated in previous articles, it is understood that, for whatever reason, media outlets will use this to paint hedge funds in the most unfavorable light possible. However, the facts are the facts!

Hedge funds outperformed the DJIA and the S&P 500 in 2018. For example, the S&P 500 closed the year down -6.24 percent, which means hedge funds, in the aggregate, outperformed the S&P 500 by 643 percent!

What’s Ahead for Hedge Funds and Hedge Fund Jobs?

Prequin, another hedge fund industry doyen, in its recent report entitled The Future of Alternatives, offered several interesting insights from their survey’s participants, the most notable of which projects the hedge fund industry to reach $4.7 trillion in AUM in 2023.

However, the same report also projects that hedge funds will slip to second place in the pantheon of alternative assets, overtaken by private equity, currently in second place. The report also concludes that growth in the number of hedge fund firms has plateaued, with some 14,800 firms in the hedge fund universe, a figure that has remained largely unchanged since 2015, which year marked the apex of the post financial crisis explosion of hedge fund starts.

The next 5 years will be ones of firm consolidation and, as a result a shrinking universe of hedge fund firms. However, within an industry whose assets are expected to grow by 31 percent over the next lustrum, it is clear that opportunities in the hedge fund industry will be plentiful.

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Hedge Funds: A Positive Perspective on 2018

January 7, 2019

Investors began 2018 with a cautiously optimistic view, duly supported by 2017’s positive returns, which paralleled the market rally. Hedge fund managers, broadly speaking, shared this hopeful vision and looked forward to improved performance and enhanced fundraising opportunities in 2018. A Look Back The year 2018 opened with a robust January HFR asset weighted composite […]

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Benchmarks: Important for Investors and Job Seekers

December 10, 2018

Hedge funds, in the aggregate, turned in yet another lackluster performance in November, 2018, which resulted in an HFR weighted composite index of -0.16 percent, which brings year-to-date performance to -2.00 percent—a hard pill for the industry (and its investors) to swallow. Also worth noting, is the fact that as of Friday, December 7, 2018, […]

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Is the Hedge Fund Industry Facing an Existential Threat?

November 26, 2018

Hedge Fund Research (HFR) reported an asset weighted composite index of -2.71 percent for the month of October, bringing the year-to-date asset weighted composite index to -0.98 percent, and HFR, in mid-November, is reporting continued declines, which suggest that November will also be in negative territory. As a result, many media outlets are, once again, […]

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Who Will Be King of the Alternative Asset Class?

October 29, 2018

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 […]

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What Is Going On with the Hedge Fund Industry?

October 15, 2018

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 […]

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