Hedge Fund Industry Posts Strong Performance in August

The hedge fund industry has posted strong gains in August, according to a Reuters report, lifted by rising global equity markets. The SS&C GlobeOp Hedge Fund Performance Index rose 83 basis points in August and has posted a 6.76 percent return over the first eight months of 2012. This index tracks the hedge funds administered by fund service provider GlobeOp, with approximately $187 billion in administered assets.

Equity Markets Posted Strong Returns in August

The hedge fund returns were boosted by strong equity markets in August, led higher by expectations of increased quantitative easing by both the U.S. and European central banks and some improving economic data. The S&P 500 provided a 2.25 percent return in August with factoring in dividends, which is reflective of a rather strong performance year to date.

Consistent Returns

The hedge fund industry has been a rather consistent source of returns for investors in 2012. The GlobeOp Performance Index has posted positive returns in every month this year, excluding fees. This is reflective of the intention of hedge funds as an alternative investment approach. For example, long and short strategies should produce absolute positive returns regardless of overall market direction. This particular strategy, and others employed by various hedge funds, are intended to outperform broader equity markets in weak market conditions, but may underperform equity markets in very bullish situations.

Seeing consistent returns like the data in the GlobeOp report suggests is reflective of hedge funds returning to their traditional alternative asset role, rather than taking outsized bets on risky positions in order to earn substantial, though risky, returns. This may encourage portfolio managers that may have shied away from hedge funds in the past to reconsider the asset class.

Fees Remain High, Impacting Total Returns

Hedge fund fees remain a concern for portfolio managers considering the asset class. While the fund portfolios have been strong in 2012 thus far, the returns seen by investors are impaired by significant fees. Generally, hedge funds charge two percent of the value of the assets under management regardless of performance to begin. In addition, funds generally earn a percentage of returns in excess of a certain hurdle. As a result, strong fund performance can be eroded by fees.

The reality of hedge funds, however, is that they require significant resources in terms of research capability and trade execution to operate their more complex strategies. As a result, many funds don’t have a great deal of capacity to reduce fees charged to portfolio managers. However, the funds do provide unique diversification, and for that, many managers are willing to pay a price.

What this Means for Job Seekers

The hedge fund industry is one area of the finance that has shown considerable resiliency over the past five years, despite a lot of negative media attention. By no means have times been easy in the world of hedge funds, but successful firms have been able to grow their book, and their staff, by attracting new investment.

Continued performance, especially the consistent performance we’ve seen so far in 2012, will continue to attract more dollars to hedge funds, and accordingly will create more jobs. These jobs will be focused in portfolio management, research and trade execution. As with any position in the financial industry, specific knowledge of fund strategies, target geographies or focus industries provides a substantial leg up on job seeking competition.

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