Thinning of Hedge Fund Herd Taking Place

Hedge fund news usually focuses on closures, openings, AUM changes, flows but what about a look at timing and what about hedge fund jobs?

While the average hedge fund returned 5.6% net in 2016 basis the HFRI Fund Weighted Composite Index, there were pockets of notable out performance.  A March Eurekahedge report noted that one strategy group of US-based hedge funds delivered over-sized performance, but they didn’t invest in large-cap US stocks.

When considering the larger issues facing the hedge fund world, including the high level of hedge fund closures, the report takes a look at the situation from a markets standpoint. What’s happening in the hedge fund industry? The high number of hedge funds chasing a limited pool of opportunity is juxtaposed against increasingly high costs of compliance and lower fees. In a free market system, this can mean a weaning of the hedge fund herd is in the offing.

Hedge Fund News – There was out performace, but it just didn’t take place in the mainstream

Determining average hedge fund performance is not an exact science. HFRI’s 5.6% 2016 performance benchmark is relative to BarclayHedge Hedge Fund Index return of 6.10% and the Eurkahedge 6.02% number. It is getting inside these numbers where nuance can be found.

With the Eurkahedge North America Hedge Fund index up 7.7% in 2016, the index points to a geographic region where hedge fund winners were located. The key differential is that the real winners for the year might not have been trading in US-based stocks. For instance, North American managers with trading in emerging markets led the industry with gains of 21.04% in 2016. Certain emerging markets can be noted for their smaller size and a fund manager’s niche orientation. In other words, the masses of hedge funds are not all competing for the same opportunity that is well-worn in the US large-cap space, where a multitude of research analysts have picked over the opportunity, which is often made public.

Event driven funds led performance across strategies, up 18.19% in 2016. This was followed by distressed debt, up 12.86%, a methodology that can be niche in its orientation and often requires research beyond the mainstream.   Multistrategy hedge funds, those typically with a diversity of beta market environment exposures, ended the year higher by 11.17%.

Hedge Fund jobs: assets go to large players

While assets under management have surged to record highs in the hedge fund industry but hedge fund jobs are being hit as managers face shrinking AUM and budget pressures from mifid2– HFRI, for instance, noted assets topped $3 trillion in 2016 – there were notable outflows of $22.7 billion during the year, Eurkahedge noted.

By Eurkahedge’s account, assets for North American hedge funds grew by $19.1 billion in 2016, such strength was “led by manager performance as opposed to investor interest.”

The shrinking pie of opportunity in the hedge fund industry is most evident in smaller hedge funds, those with assets under $50 million. “Small sized hedge funds have seen their market share decline by 8.9%, with the proportion of smallest-size hedge funds within this tier (below US$20 million) seeing their share decline by 5.0%.”

In this environment, hedge fund launches have been weak. By Eurkahedge’s tally, there were only 407 launches in the industry but the launch activity might increase in 2017, the report opined.

Long/short equity and CTA/managed futures strategy were strategies to see the most launch activity since 2008, but that trend is in part correlated to performance. “CTA/managed futures mandated funds have declined in popularity as their performance over the past few years has been disappointing,” the report stated. Long/short funds, which can be noncorrelated to various degrees depending on their portfolio management, continues to see strong growth. “Despite weak launch activity in 2016, fund population for long/short equities mandated hedge funds has seen the strongest growth among all strategic mandates (454 funds).”

As has been the recent trend, it is the larger hedge funds who receive the lion’s share of the allocation and where the hedge fund jobs are at: