The Patriots and the Markets Suffer a Devastating Loss

The hedge fund industry is off to a stellar start in 2018, as HFR reports. Average hedge fund gains of 2.45 percent, a January monthly performance record unmatched since 2006, were achieved. While this is, unquestionably, an auspicious beginning, we must remember that past performance is no guarantor of future success.

What Happened Next?

Post Super Bowl 52, all major market indices plummeted. The Dow Jones Industrial Average (DJIA) fell 1600 points before rebounding. At the closing bell, the DJIA was down 1179 points.

The S&P 500 tumbled nearly 4 percent, the Nasdaq Composite suffered a similar decline (3.8 percent) and the Russell 2000 lost about 2.9 percent. These declines erased 2018 gains and, according to CNBC, resulted in the loss of $1 trillion in market capitalization for the S&P.

The most interesting aspect of the decline is that it played no favorites. It was deep and it was broad, touching all eleven sectors in the S&P 500, with the financial, health-care and energy sectors being the hardest hit among them.

Equally troubling is the VIX, a volatility index, sometimes referred to as the fear gauge, which rose 88 percent, a record rise for a single day.

What Does This Mean for Hedge Funds?

In the mix of average hedge fund gains are those hedge funds employing an equity strategy, be it market neutral or fundamental. In this context, market performance and market volatility can play a significant role in the average performance numbers the hedge fund industry generates going forward.

One cannot help but marvel at the irony. The bull market represented a headwind to which the industry was slow to adjust. Now that the adjustment has been made, the markets played this cruel joke, which requires that hedge funds adjust once again.

Of course, it is much too early to speculate on the direction the markets will ultimately take. It would not be prudent to suggest that Monday’s events mark the demise of the bull market. Pullbacks are always going to occur. However, it would be imprudent for hedge funds to ignore Monday’s event, passing it off as an anomaly, though it may be no more than that. No one should paint this as a correction, a blip or an apocalypse. The data is just not there.

What about Hedge Fund Jobs?

As has been said many times before; there is always room for exceptional talent in the hedge fund industry. As new headwinds arise, so do fresh opportunities. For example, there is increased interest in artificial intelligence (AI) within the industry. These artificially intelligent stock picking programs are driven by algorithms that are developed by quantitative analysts, capable of doing the number crunching required for this technology. An event such as Monday’s has the potential to push this technology to top-of-mind with fund managers that previously may have dismissed the concept. The hedge fund industry represents almost one-half of the $6.5 trillion invested in alternative asset class. That should tell you most of what you need to know about hedge fund jobs.

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