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Let’s ensure that we are on the same page before diving into this topic. Reflation, in the context of this article, refers to implementing a government’s fiscal policy and/or a central bank’s monetary policy in a manner that halts or reverses a deflationary trend. A government’s fiscal policy may include, for example, cutting taxes, or making substantial investments in infrastructure projects.

The central bank’s tool kit would include raising/lowering interest rates and, more recently, quantitative easing. Quantitative easing is the large scale purchase of assets, usually bonds, from banks with an eye toward stimulating the economy. Quantitative easing accomplishes this by increasing the money supply, reducing the cost of capital and stimulating investment.

What Is Reflation Supposed to Accomplish?

A reflation policy is intended to alter the trajectory of a deflationary trend in which the prices of goods and services decline. It is important to note that deflation is not synonymous with disinflation, which is defined as a slowing of the rate of inflation.

How Does Reflation Affect Investors?

As stated earlier, reflation may be implemented via the central bank by increasing interest rates. Such increases will cause the price of existing bonds to fall because they will be forced to compete with new bonds issued with higher yields. Many investors will elect to sell older bonds in favor of purchasing new bonds issued with a higher yield. These are actually called reflation trades.

In terms of equities, historical data show that P/E ratios tend to rise as the rate of inflation increases from greater than 1 percent through less than 3 percent. This fact will impact investment decisions for many investors.

What Is the Effect of Reflation for Hedge Funds?

Hedge funds are investors too, and, as such, must be constantly alert to government and central bank policies that impact the markets. This is particularly the case in the era of Trump, as many of the administration’s policies are deflationary in nature, such as tax cuts and the proposed infrastructure expenditures.

One can sympathize with President Trump’s concern regarding the Federal Open Market Committee’s (FOMC) plan for continued interest rate hikes, which, quite literally, would compound the effects on inflation—effects that were already being brought about by the government’s tax cut and administration plans to step up infrastructure spending. Although roundly criticized for interfering with the course FOMC chair Jay (Jerome) Powell had set, President Trump’s concerns were most likely justified.

Allocations are likely to grow as investors recognize the favorable returns occurring in growth assets and analyze risk in terms of opportunity cost.

What about Hedge Fund Jobs?

Hedge funds enjoyed strong gains in January, with a 1.53 percent gain in HFR’s asset weighted composite index. While not as robust a start to the New Year as 2018’s January gain of 2.74 percent, it is a welcome change in comparison to last year’s overall negative performance, which saw the asset weighted composite index close down (-0.84 percent) for the year.

While the job prospects for mid-level hedge fund professionals remain tight, demand for entry level, back office, and other positions are strong.

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Both 2018’s hedge fund performance record and Super Bowl LIII results are in the record books. While it is relatively simple to understand the past, the future is exponentially more difficult to grasp. More than three-hundred fund managers and 120 institutional investors participated in a Prequin survey in an attempt to divine the future of the hedge fund industry. Here’s how they perceive the next 5 years unfolding.

Hedge Funds Fall to Second Place

Currently, hedge funds are the largest class of alternative investment and is predicted to grow by 31 percent over the next 5 years to become a $4.7 trillion industry. However, private equity is anticipated to grow by $1.8 trillion in the next 5 years, eclipsing hedge funds by reaching $4.9 trillion in assets under management.

Shrinking Hedge Fund Investment

Among those currently invested in hedge funds, around 1 in 4 expect to increase their allocations to hedge funds over the next 5 years, while fewer than 2 in 10 plan a decrease in their hedge fund allocations.

Evidence supports that this is already happening. For example, hedge funds experienced net outflows of $11.1 billion in 2018. More to the point, this recent article in Bloomberg presents a graphic illustration of attrition in some of the most lauded hedge fund firms in the industry.

Modest Growth in Hedge Fund Allocations Is Not Necessarily a Negative

Those investors who do allocate to hedge funds tend to invest a larger percentage of their portfolio, typically 14 to 15 percent, as compared to private equity (PE) investors, for example, who typically top out at 9 to 10 percent of their portfolio.

This suggests that even though the number of hedge fund investors may shrink, the size of their hedge fund investment will mitigate the loss of those investors who seek a haven in other alternative asset classes.  In short, the growth of hedge fund assets under management will be slower, but steady.

Single & Multi Family Offices Are Showing Increased Interest in Hedge Funds

Fully two-thirds of hedge fund managers surveyed, believe that family offices will become their primary sources of capital over the coming 5 years. This is consistent with the private wealth origins of the hedge fund industry and a marked departure from the past 15 years of growth, which was driven by institutional investors. Hedge funds are returning to their roots!

What Does This Mean for Hedge Fund Jobs?

The rapid expansion of hedge funds and the corresponding increase in the numbers of hedge fund managers and staff is a well-established fact. However, the universe of active hedge fund firms has leveled off since 2016 to approximately 14,800 hedge fund firms world-wide. Hedge fund managers are largely agreed (91 percent) that consolidation will be the hallmark of the next 5 years, with 26 percent of hedge fund managers suggesting that the consolidations will be significant.

If these predictions come to pass, one might reasonably anticipate substantial employee turnover. The manner in which hedge fund managers approach these challenges will determine the future for jobs in the hedge fund industry.

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In the Wake of 2018 What Is the Future of Hedge Funds?

January 21, 2019

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 […]

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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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Will Poor Hedge Fund Performance Hurt Jobs?

December 24, 2018

Here we are, in the closing days of the worst year for the hedge fund industry since the financial crisis. According to HFR, hedge funds, in the aggregate, were down .16 percent in November and 2 percent for the year. Concurrently, Eurekahedge data suggest that the combined effect of investor redemptions and performance based losses […]

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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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