From the category archives:

Hedge Fund News

Robots, once the bane of blue-collar workers, may now threaten the livelihoods of hedge fund professionals. Taxi and Uber drivers are menaced by driver-less technology, fast food workers are marginalized by robots capable of making a burger in less than ten seconds, and BlackRock, Inc. is implementing data-driven, artificial intelligence (AI) programs that will ultimately replace as many as seven portfolio managers and dozens of analysts.

BlackRock’s foray into robotic investment represents its latest effort to rescue an actively managed equities business on the decline. BlackRock’s actively managed equity assets, which stood at $317 billion in December 2013, dwindled to $275 billion by December 2016.

Clearly, BlackRock is not the only firm facing this problem. In the last twelve months, $442 billion flowed from actively managed equities, while $542 billion surged into passive index funds—a swing of almost $1 trillion.

What’s Driving This?

It is relatively easy to grasp the cost/benefit of robotic short order cooks but the driving forces behind robotic investment are more complex. The two factors driving this decision are performance and fees. While the jury is still out on the performance metrics of robotic investment, the fee side of the equation is less opaque.

These calculations will make the rationale for robotic investment clear. According to the Investment Company Institute, mutual fund managers earn about $131 in fees per $10,000 invested. Contrast this with the $18 in fees earned on $10,000 invested in passively managed index and exchange traded funds.

Based on BlackRock’s portfolio of $275 billion, robotic portfolio management has the potential to reduce fees from around $3.6 billion to about $49.5 million. Of course, these calculations do not factor in development and implementation costs. In the case of BlackRock, these expenses may be offset by eliminating the salary and bonuses of multiple portfolio managers and dozens of analysts. One thing is certain; the potential fee savings for investors are staggering.

Implications for Hedge Funds

Hedge funds face similar performance and fee challenges. However, hedge funds have succeeded in maintaining asset growth through the majority of the years following 2005 and have recently achieved all time highs in terms of assets under management.

This is not to say that the hedge fund industry is behind the curve in its efforts to incorporate AI, algorithms, and similar robotic investment strategies. One need not look beyond such firms as Renaissance Technology, Bridgewater Associates, and Steve Cohen’s Point 72 Asset Management, which recently set up a vehicle to finance AI startups.

What Does This Mean for Hedge Fund Jobs?

The hedge fund industry has unique relationships with its investors as compared to actively managed U.S. stock funds, which have a significant retail investor component. The relationships between hedge fund investors and portfolio managers are profound and, as such, will be particularly resistant to exclusively robotic portfolio management.

While the hedge fund industry explores and employs the technology, it is unlikely to be something other than a zero-sum game in terms of job opportunities in the industry.

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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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Will Trump’s Core Regulatory Principles Favor Hedge Funds?

February 20, 2017

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 […]

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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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