As 2017 marches to its close, thoughts inevitably turn to the promise and challenge of the New Year. The hedge fund industry is on track to achieve its most successful year since 2013 in terms of gains and assets under management.
Year-to-date gains, by most reports are 7.5 percent and assets under management have reached $3.25 trillion, a record high. Although hedge fund closures have outpaced new starts in 2017, many view this as a positive…market forces at work, weeding out the non-performers and strengthening the overall industry.
How Do These Metrics Affect Jobs?
Hedge funds suffered a significant series of redemptions, beginning with the September 2014 CalPERS announcement of its withdrawal from hedge funds. In 2016, the industry bled more cash than in any year following the financial crisis.
Unquestionably, a strong finish in 2017 will enhance job prospects. Many of the investors that fled hedge funds may re-think their positions with regard to hedge fund investment. Obviously, top-performing hedge funds will receive the lion’s share of investment from those returning to the hedge fund fold. As a result, we are unlikely to see hedge fund starts outpacing closures in the New Year.
That said, significant gains in AUM, almost certainly, would increase the number of job opportunities in the industry.
Passive vs. Active Investing
As many are aware, passive investment has been promoted by the likes of Warren Buffet and others of his ilk. Passive investment also received favorable treatment by many in the financial media.
As a result, passively managed AUM has grown from 12 percent in 2010 to 18 percent in 2016, according to the McKinsey Global Asset Management Report. Interestingly, despite this 50 percent jump in AUM, revenues remained constant throughout this period at 3 percent.
Consequently, any rational person has reason to question the viability of continued growth in this sector. Naturally, if AUM growth in passive investment does decline, hedge funds should position themselves to acquire the lion’s share of the reinvestment that will necessarily occur.
A Paradigm Shift in Portfolio Construction
The bull run, having celebrated its ninth birthday, is causing many investors to contemplate what happens when it ends. Hedge fund managers are no exception. As a result, we are beginning to see a transition of focus— a focus toward risk and performance drivers and away from asset classes. Just as retooling for a new model creates job opportunities in the auto industry, job opportunities will arise in the hedge fund industry as it “retools” for portfolio construction favoring risk and performance drivers.
Final Thoughts
Greater employment opportunities in the coming year are almost a certainty in the hedge fund industry. The level of human capital required by active investment is greater than what is required for passive investment.
Investor faith in hedge funds has been, to some extent, restored. Assets under management are likely to grow as a result. That, in combination with widespread concerns regarding the bull run’s end, is certain to drive investors in the direction of hedge funds as their interest in preserving capital is going to exceed their contempt for the hedge fund fee structure and diminish their interest for out-sized returns.
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