From the category archives:

Hedge Fund News

President Trump’s executive order, signed January 30 of this year places Dodd-Frank squarely in the administration’s cross hairs. The impact of this executive order would not be so daunting if the legislative process had not been outsourced to the Federal agencies charged with implementing the legislators’ perceived wishes through regulation—a defect that future lawmakers might want to amend.

The driving force behind all that is wrong with Dodd-Frank is regulation rather than law. As a result, the President is using his legal authority to undo these regulations. It is this legislative shortcoming, which allows the President to act as he sees fit for the economic well-being of the country.

A Modest Beginning

Although the loophole is a large one, Trump seems content, at least for the moment, to halt the promulgation of new regulations by mandating that two be withdrawn for each new one that is promulgated. This executive order will act as a powerful brake against the proliferation of new regulations. However, what happens if undesirable regulations remain in force?

The answer rests, in part, with the results achieved under the mandates that follow in Sections 2 and 3 of the executive order. In short, this demands a review by agency heads of existing and repealed regulations to ensure that increases in regulatory costs to the private sector are held to zero. Any deviations must be approved by the Director of the Office of Management and Budget unless the offending regulation is required by law or preapproved by said Director.

However, the teeth bared in this executive order can be found in Section 2, subsection (d) that states, “The total incremental cost allowance may allow an increase or require a reduction in total regulatory cost.”

Going Forward

Clearly, the President can choose the latter course and require reductions in the total regulatory costs of sundry Federal agencies, but, for now, he seems content with the “make-one-lose two” approach.

Nonetheless, the law firm of Cole-Frieman & Mallon LLP, in a letter to clients, friends and associates, stated that, “While a repeal of Dodd-Frank is unlikely, the coming months may bring a number of deregulatory changes.”

The firm’s letter touches on several regulatory initiatives but one is of particular interest to the hedge fund industry. It reminds us that California’s Public Investment Fund Disclosure Requirements have been in effect since January 1, 2017. This legislation mandates additional disclosures from hedge funds and other alternative investment funds that handle investments from California’s state and local public pension and retirement systems. If your firm has investments of this type, be prepared to respond to questions regarding fund fees, expenses, and performance that may go beyond the levels of transparency to which your firm is accustomed.

What About Hedge Fund Jobs?

Readers in the compliance arm of the hedge fund industry may be feeling some level of insecurity. Be assured that these concerns are likely without merit. In fact, compliance personnel will probably find themselves busier than ever as they digest the impact new, as well as repealed regulations, will have on their firms. Then there are always the states to contend with, as we have seen with California. One might even find himself in a position to seek a salary increase.


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.


Surprisingly Investors Remain Bullish on Hedge Funds

March 5, 2017

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 […]

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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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