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Although 2018 hedge fund industry performance was its worst in nearly a decade, the majority of institutional investors surveyed in a recent Prequin report, expect to maintain or increase hedge fund allocations.


One might reasonably expect that on the heels of 2018’s collective 3.41 percent loss, institutional investors would turn their attentions elsewhere, and some will. However, a clear majority (79 percent, according to Prequin) has opted to place their bets on hedge funds, and plan to maintain and/or increase their allocations.


Isn’t that Counterintuitive?


Not really. Consider this oft repeated phrase, “past performance may not be indicative of future results.” When we read this phrase in a prospectus, for example, human nature leads us to assume that the performance of the investment in question may deteriorate. However, is it not equally possible that it will improve?


One astonishing example of such improvement is illustrated by Ray Dalio’s Dark Horse Pure Alpha fund, which having returned 1.2 percent in 2017, closed out 2018 with a jaw-dropping 15 percent gain. Past performance was no indication of this happy result!


Many of those responsible for allocations, believe that this decade long expansion is rife with bloated asset valuations and flagging economic growth, both of which are being exacerbated by growing protectionism and trade wars.


The natural outgrowth of such a pessimistic view is hedge fund investment. Although no one can know with certainty where we are in cyclical economic and market environments, it is no less clear that the environment is undergoing a shift. In such an uncertain climate, institutional investors are turning to hedge funds—not counterintuitive at all!


This is why 79 percent of institutional investors polled in Prequin’s report, the largest contingent of investors since 2014, plan to maintain or increase their hedge fund allocations in the coming months.


Since the Financial Crisis


The hedge fund industry has seen its obituary written multiple times since the financial crisis and, to be sure, the industry as a whole has seen some dark times since 2008. However, hedge funds continue to innovate, explore new strategies, and adopt new technologies. As a result, we are still here; we are still growing; and we remain relevant. Like Mark Twain’s death, the reports of the hedge fund industry’s demise have been highly exaggerated.


What about Hedge Fund Jobs?


Crypto-currencies, artificial intelligence, machine learning, big data, algorithms, block-chain technology and quants; these are terms that would not be heard in the same breath with hedge funds less than a decade ago. However, it is difficult to find a hedge fund news article today that does not contain at least one of these terms.


This speaks volumes to brighter prospects for hedge fund job seekers. Skills, talents and educational backgrounds once far removed from any relevance to a hedge fund firm are now integral to its daily operation.


As business cycles ebb and flow, and markets wax and wane, the hedge fund industry will be along for the ride, innovating and adapting as it has since the beginning. Demand for hedge fund jobs will continue to grow, to meet the changing needs of our evolving industry.

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Hedge fund returns are in the red for the first time this year, with an average reported negative gain of 0.75% in June. The Federal Open Market Committee’s (FOMC) decision against an increase in the Fed Funds rate is perceived by many to be the principal driver behind the current bull market and, incredibly, the primary cause of poor performance across the hedge fund industry.

She Loves Me, She Loves Me Not

Janet Yellen, Chair of the FOMC, has alternately put a rate hike on the table and taken it away, in much the same way lovers play the old French game of ”she loves me” … “she loves me not”. However, Yellen seems to be plucking petals from an ox-eye daisy while alternating the phrases, “rate hike … no rate hike.”

Yellen’s version of the game may not be one of the heart as much as it is of heart attacks!  Many would argue that the unnatural direction of the markets is fueled by this prolonged period of near zero interest rates and has wreaked havoc on hedge fund returns. While this may or may not be the case, the FOMC’s rhetoric and perceived indecisiveness on the subject of a rate hike may certainly be a contributing factor.

We Have a Short Memory

This most recent bull market has been on-going for 2,331 days—6 years, 4 months and 18 days. And while it is true that investor’s jitters increase proportionately to the duration of the bull market, this one comes in at a distant third among the 6 bull runs we have had since 1949.

Bull Market Durations - HF Alpha Calling

In fact, the average bull market has lasted 2,571 days, which means this run is below average in terms of duration.

The trajectory of the current bull market seems assured to result in a second place finish, at the very least. It is improbable that a modest rate hike announcement would end the current bull market. That would require at least a 20% drop from its high (currently 18,351.40) and few would support the contention that such a hike would result in the Dow plummeting to 14,681.12.

Facing Facts

Hedge funds have not been meeting expectations. Returns, in the aggregate, are unimpressive. Short and long/short are not optimum strategies in a bull market. Add to this the uncertain direction of interest rates, currency valuations, oil gluts, ECB policies, China’s slowdown and geopolitical turmoil and anyone can grasp why hedge fund managers are having challenges.

Hedge Fund Jobs

When hedge fund performance is reported in the aggregate, or as an average of all funds and strategies, the outliers are short-changed. Hundreds of hedge funds that have performed extraordinarily well in this hostile climate and no one should lose sight of that fact.

Those who seek a career in hedge funds should not be discouraged by the barrage of statistical data which seeks to diminish the industry. Don’t be misled. Hedge funds have a key role to play in the financial system. Although the perception of hedge fund ineptness is being fostered in some circles, the truth is the industry is simply being painted with the proverbial “broad-brush.”

Always remember it is never the goal of any hedge fund to beat a market index. Rather the goal is to make the most of investment opportunities while preserving capital.



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