From the category archives:

Hedge Fund News

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 index score of 2.74 percent, but by the end of the first quarter, negative gains in February and March had whittled that down to a meager 0.48 percent gain. Worth noting, is the fact that the Dow Jones Industrial Average (DJIA) fell 2.49 percent in the same period, allowing hedge fund investors to continue to hold their heads high.

2018’s second quarter continued to be marred by losses in April and June of -0.05 and -0.14 percent respectively. May, 2018 turned in a positive result of 0.65 percent, bringing overall second quarter gains to 0.65 percent, which translated into first half gains of 1.23 percent.

Meanwhile, the DJIA turned positive in Q2, gaining 0.7 percent. However, first half gains for the DJIA were deeply into negative territory at -1.8 percent, once again providing cover for those investors so bold as to allocate to hedge funds.

Quarter 3 was an overall positive one for hedge funds, with positive gains posted in July and in August of 0.18 and 0.48 percent respectively. However, October slipped into negative territory, falling -0.05 percent. Nonetheless, overall Q3 gains stood at 0.61 percent and, year-to-date, the HFR asset weighted composite index had achieved 1.68 percent.

Concurrently, the DJIA rocketed, resulting in year-to-date gains of 7.03 percent through the end of September, 2018, which left hedge fund investors scratching their heads.

The story of Q4 is very similar to Q3, with October and November gains in dark territory, at -2.71 and -0.41 percent, respectively. Through November, 2018, year to date gains were negative, albeit narrowly at -0.06 percent. HFR has not published its December data at the time of this writing, but it is unlikely that hedge fund year-to-date losses will exceed those of the DJIA or the S&P 500.

For the DJIA, Q4 was nothing short of a debacle, with year-to-date gains plummeting by -5.63 percent.

Other Noteworthy Data

2018 was marked by a 38 percent decrease in the number of hedge fund firms pursing an equity strategy, falling from 48 percent of firms in 2017 to 30 percent of firms in 2018. Although the equity strategy remains the most popular, at 30 percent, credit strategies are nipping at their heels, rising to 29 percent of hedge fund firm strategies.

Hedge fund fees continue to retreat, with 83 percent of hedge fund firms charging a management fee of less than 2 percent. Just 13 percent of hedge fund firms charged a 2 percent management fee in 2018, and only 4 percent of hedge fund firms charged management fees in excess of 2 percent.

What about Hedge Fund Jobs?

Predictably, hedge fund job seekers will see significant negative press on the hedge fund industry’s performance in 2018—don’t allow this to dissuade you from your goals. After all, the S&P 500 was down -6.24 percent, year ending 2018, a benchmark that hedge funds will no doubt beat by a significant margin. The hedge fund industry continues to play a significant role in the U.S. economy and we fully expect job prospects will mirror that significance.

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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, the S&P 500 went negative for the year, having lost all its year-to-date gains and then some. If misery loves company, hedge funds have found their cupid.

Stock Markets as Benchmarks

While this may be the ideal moment in time for hedge funds to make comparisons to the S&P 500 as something of a benchmark, most hedge fund professionals agree that the S&P 500 or the Dow Jones Industrial Average (DJIA) have no value as benchmarks for hedge fund performance because hedge funds are supposed to be uncorrelated. Why? Because they hedge! This necessarily mutes their relative performance in a bull market or rally, which makes any comparisons meaningless.

Moreover, hundreds of hedge funds have not a single stock in their portfolios. Hedge funds have multiple strategies, many of which are based upon investments in currencies, bonds, merger arbitrage, commodities, and other alternative assets that do not revolve around the stock markets.

How meaningful is a comparison to the S&P 500 or DJIA for hedge fund firms employing these strategies?

What Hedge Funds Should Do

These times cry out for the hedge fund industry to develop a meaningful metric that better informs current and potential investors, and silence those that would compare hedge fund performance to the S&P 500 or the DJIA, unhelpful benchmarks at best and downright misleading at worst.

HFRI, Hedge Fund Research Indices, although a respected industry benchmark, is not a satisfactory measure of a given hedge fund’s performance, nor, in fairness, is it intended to be.

For example, pension funds need an absolute return to pay their pensioners. Pension funds have fixed obligations which they must meet. It doesn’t help them much to know that their hedge fund is losing less money than the aggregate return of other hedge funds. In short, investors need to know if a hedge fund can meet their goals over a given time frame, not how it performed compared to an aggregate of funds, the S&P 500, or the DJIA.

The Problem

The boundary between a hedge fund and an active fund manager is blurred, at best. As a result, it might be accurate to say that no definitive hedge fund industry exists. Absent a distinct hedge fund industry, it will be extremely difficult to achieve an industry accepted method or metric against which performance may be measured. This gives rise to another issue. If there is no unambiguous definition of a hedge fund, it is impossible to ascertain the assets being managed at any particular point in time.

What about Hedge Fund Jobs?

Here is the point. The ability to benchmark hedge fund performance is, in many ways, just as important to job seekers as it is for potential investors. Do you want to begin your career at Burger King or Morton’s Steakhouse?

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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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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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