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Renewed confidence in financial markets generally, and hedge funds in particular, seems to have launched the industry forward in early 2013. According to the Boston Business Journal, however, fees have continued their downward trend despite the renewed interest. With dwindling revenues despite climbing assets under management, how the industry copes with this changing dynamic will have a significant impact on hedge fund job seekers. Higher expenses from regulatory costs and taxation also are pressuring the bottom line for hedge fund managers.

New Hedge Fund Launches Up Significantly in First Quarter

The first quarter of 2013 saw a significant increase in new hedge funds being launched. The Chicago-based Hedge Fund Research Inc. reported that 297 funds were launched in the first three months of the year, which is the third highest quarterly total since the beginning of 2008. The first quarter of the year is traditionally a strong quarter however, with the only two stronger quarters coming at the start of 2011 and 2012.

The new hedge funds that are being launched are far more conservative than in the past, however. Industry executives have told the Boston Business Journal that most new launches are small and are taking much longer to come to market. “No one is doing anything overly funky,” Michael Silvia, Director at Marcum LLP told the Journal.

Strong Track Records Behind Successful New Launches

Many of the new hedge funds that are being launched are led by established and experienced managers. In uncertain economic times, the strong track record behind these managers provides some confidence to weary investors. Those with less experience are finding themselves seeing small allocations as investors test the waters carefully, or in some cases, they are unable to access the market altogether.

Fee Revenues Declining Despite Renewed Interest

Importantly for hedge fund bottom lines, and accordingly, the ability for firms to bring on new talent, fee revenues have not experienced similar strength in light of this renewed hedge fund interest. In general, investors are feeling fees are too high. Daivd Simoes of Deloitte’s hedge fund practice told the Journal that “the days of ‘two and 20’ are behind us,” reminiscing over the days when fund managers could comfortably earn two percent of assets under management as a flat fee and a 20 percent bonus fee for outperformance. In fact, in the first quarter, hedge funds earned 1.55 percent in management fees on average, and only 17.4 percent in average incentive fees.

What are the Implications for Hedge Fund Job Seekers?

The ongoing pressure on hedge fund fees is weighing heavily on their ability to hire more individuals, despite the growing funds they are managing. Overall, the industry has seen a substantial increase in costs as well, as regulation and taxation issues weigh heavily. This double impact of lower revenue and higher overhead expenses makes it hard to offer higher compensation to core investment staff or to make the investment in bringing on new members to the team. Unless the industry can see some stabilization on the fee front, hedge fund job opportunities likely face continued pressure.

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One of the next growth opportunities for the hedge fund industry may be the retail market, as investors increasingly seek out alternative asset classes. With analysts predicting that retail assets for the industry will climb to $940 billion over the next four years, from only $305 billion at the beginning of 2013, this represents a major opportunity for hedge funds, if they met these lofty expectations.

The Financial Times argues the trend is a convergence of traditional asset managers seeking out products with higher returns and hedge funds looking for additional capital. The demand from asset managers is a result of the struggle to offer alternative products to compete with low fee exchange traded funds (ETFs). While hedge funds certainly don’t offer lower fees than ETFs, they do offer strategies that can be marketed as unique and advantageous for investors. This is especially true in comparison to active equity or bond funds that as a whole haven’t been able to justify their fees in comparison to their ETF peers.

Mutual Fund Firms Snap Up Hedge Fund Managers while Retail Funds Launched

The mutual fund industry has been quick to move into the hedge fund space in order to establish a presence. Franklin Templeton was one mutual fund giant that was active in the hedge fund space, acquiring a majority position in K2. Legg Mason also was involved, adding Fauchier Partners to its group.

While these managers have been busy making acquisitions, hedge fund managers have been launching retail-oriented funds on a more frequent basis. Highbridge and AQR have recently released their own retail funds, while KKR has launched a fund to be distributed to retail clients by Charles Schwab. All of this stacks up to increasing pressure on the traditional mutual fund industry.

Shift in Fee Model May be Behind the Movement

One of the leading factors in the increased interest in retail hedge funds may come from how asset managers are compensated by their clients. Sandy Kaul, head of business advisory services for Citi Prime Finance, told the Financial Times, “In the US wealth adviser market there has been a shift in the pay structure, away from fee-based commissions over the past 10 years, and an increase in fees on assets under management.” As a result, wealth managers are looking to hedge funds to preserve asset value, and therefore, their fee revenue.

What are the Implications for Hedge Fund Job Seekers?

The potential for large scale retail acceptance of hedge funds is an important development for those currently in the industry or potentially seeking future opportunities. Many analysts have wondered where exactly future growth for the industry would come from, and in the past, retail investors would have seemed like a long shot. But recent regulatory changes and growing enthusiasm from money managers seems to be changing that belief. Retail hedge funds are increasingly viewed as a core component of future wealth management offerings. As a result, the increased growth potential of the industry should come as welcome news for those in the industry or considering a future in hedge funds.

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Hedge Funds Remain Resilient

May 13, 2013

It is no secret on Wall Street that hedge fund returns haven’t been a source of excitement this year. In fact, hedge funds have struggled to post gains of only 4.6 percent to date, despite the S&P 500’s meteoric climb past 15 percent in the same span of time. While many would expect hedge fund […]

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Hedge Funds Look to Japan for Opportunity

May 6, 2013

After decades of lackluster and even declining performance, Japanese equities are seeing renewed interest from hedge funds across the world. As the Bank of Japan enters a new era of loose money policy, mostly implemented through quantitative easing similar to that being undertaken in the US, a declining Yen has the largely export-focused Japanese economy […]

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Hedge Funds Lured by Unconventional Locales

April 29, 2013

Hedge fund managers might want to begin to learn some Czech as the Eastern European nation becomes one of the latest countries attempting to kickstart a domestic financial industry. The opportunity to establish Prague as a financial center comes as a change in European Union regulation, coming into effect in July, gives preferential treatment to […]

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New Hedge Fund Launches Decline

April 22, 2013

The former reality of frequent hedge fund launches is no more, with tighter fee margins and higher costs weighing down the industry. While, according to a recent article by the Economist, billion dollar hedge fund launches typically were viewed as commonplace in the past, current new offerings are generally much smaller and less frequent, causing […]

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Hedge Funds Face Growing Concerns over Perceived Corruption

April 15, 2013

Following the financial crisis, the general public has become increasingly skeptical of the financial industry, questioning whether many firms, including hedge funds, are acting ethically. According to an article from Forbes, there may be merit behind that skepticism. Referring to a report published by New York law firm Labaton Sucharow, which specializes in class-action securities […]

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