Will the Bloom Return to the Hedge Fund Rose?

In the wake of countless glowing articles touting hedge fund gains through the first half of 2017 as well as new industry records for assets under management, hedge fund managers can’t help but be pleased—and who can blame them?

Here Are the Facts

Hedge fund gains have been in positive territory for the past eight months, with cumulative gains through the first six months of 2017 reaching 4.87 percent. Looking at the most recent twelve months, we see average hedge fund gains in double-digit territory…10.91 percent! Hedge Fund Research reported this eight-month run of positive gains as being the longest since early 2004… and that’s not all!

According to eVestment’s recent Assets Flow Report, the hedge fund industry gained $20.65 billion through the first half of 2017, which brought industry assets under management to a new record high of $3.12 trillion.

Here Is the Pushback

No one will argue that positive gains are not a good thing. However, 4.87 percent through the first half is not a number that excites when one considers that the S&P 500 was up 8.2 percent, the DJIA was up 8 percent and NASDAQ was up 14.1 percent in the same period, according to MarketWatch.

Another troubling fact is that although asset flows were indeed positive through the first half, investors withdrew almost $7 billion from hedge funds in June.

Finally, the number of hedge funds closed in the first half of 2017 outpaced the launches of new funds for the sixth consecutive quarter. However, many hold the opinion that this is actually a positive for the industry, recognizing that poorly performing hedge funds should shutter, thereby improving aggregate gains for the industry.

Regardless of your take on this matter, the fact remains that the total number of hedge funds and funds of funds stood at 9,691 at the close of the first half, down 4.45 percent from its previous high of 10,142.

In spite of all this good news, the Illinois State Board of Investment has dropped hedge funds as a separate investment.

Will the Bloom Return?

Only time will tell! However, there are many reasons to be optimistic regarding the future of the industry. Asset flows and gains are the primary concerns. According to HFR, mid-July gains stand at 0.73 percent, and if asset flows remain positive as well, the hedge fund industry could reasonably expect increased inflows from institutional investors, pension funds, endowments and high net worth individuals. Some suggest this is already occurring. If true, the bloom will indeed have returned to the rose.

What About Hedge Fund Jobs?

Positive returns and positive inflows can only be positive for hedge fund job seekers. However, we cannot forget that annoying problem of hedge fund closures outpacing hedge fund launches. The industry will require time to adjust. While it may not be the best of times to be seeking a hedge fund job, it is certainly not the worst of times. Demand may be somewhat diminished and competition may be heightened, but this is not to say that genuine talent cannot find a way through the door.