Are Hedge funds losing their shine?
The returns of Hedge Fund firms this past year have been consistently dropping and now that number has been the lowest since 2008. Working in big banks, albeit boring, has been the backup plan for successful traders. At this moment, working in big banks isn't looking too shabby.
From Bloomberg:
The sheen is off hedge funds after some trying years, and while some will undoubtedly wager successfully in this deteriorating credit cycle, more of them will fail to survive. In contrast, a big-bank job doesn’t look so bad anymore.
Why would these traders and bankers return to embattled large institutions after sampling the sweet hedge-fund life? Well, banks became more stable and hedge funds have turned a littler sour over the past few years. Their returns have lagged behind market benchmarks, and last year’s losses among some hedge funds were so severe that they either went out of business or returned all outside capital.
Do you guys think hedge funds are a lost cause? Or is it worth for traders to ride them out?
These things move in cycles. The market is getting pretty beat-down on macro issues and stocks are not necessarily trading on fundamentals which is bad for HF's near-term. Long-term it creates some interesting value propositions (everything is on sale!). Just depends on your time horizon.
I find it really interesting how 6 weeks ago every major news org reported that no one wanted to work at embattled major financial institutions and everyone wanted to work at HF's and PE. I'm waiting for the unicorn bubble to blow out and see the news stories of every HBS/Wharton grad wanting to work in IB because the sheen has worn off of Silicon Valley.
That will be interesting, when these start-ups start having to deliver real revenue and results and I cannot say how many will be able to.
It's all well and good to 'disrupt' an industry, but it only goes so far if you can't monetize it. The innovation economics of VC will be essential into the future, but will come under tighter scrutiny, hopefully returning to a results driven investing mindset that needs more than wishes and good will.
Maybe we'll get a shift to PE entering former unicorns and dragging them out of la la land.
A lot of the tech IPO's which relied of consumer products have had pretty rough IPO's or even acquisitions. Its a weird situation because most focus on accruing ARR (annual recurring revenue) it means that although right now 200MM a year in revenue isn't good (paying for engineers, consultants, blah) incrementally that 300MM will have a higher profit margin (already fully developed product and less need for innovative SE's and really on QA, and small improvement teams).
What I'd like to see is the fact that new tech companies remind me of insurance giants. They build this large recurring model (not based on brand loyalty but out of necessarily creating a mini-monopoly or at least competitive advantage) and then holding onto it and just growing each year. At some point I'd love to see them treat it as float capital and invest some of the profits and revenue more broadly.
There are pools of PE capital being put together for this strategy as we speak. I don't know who could take an Uber sized company down even if the valuation was halved or quartered (not going to be able to leverage acquisitions like this so I don't know if even a BX or KKR would take down an all equity $10-$25B deal) but there are hundreds of potential acquisitions out there and a big opportunity to employ a PE/VC/Growth Eq hybrid approach. You'll see it happen soon.
Threads repeated every week for the past 8 years on WSO regarding hedge funds:
Depends on the hedge fund. Value, event driven, and macro funds have done awfully.
Value funds haven't done well this entire market cycle from 2008 to now. It's more because value is changing. It's harder to interpret balance sheets when there's fewer tangible assets like buildings and machinery, and more things like patents and R&D expenses where you have to estimate their future value. I think value funds are going to have the hardest adjustment period moving forward because it's harder to find where value really is.
These were also weird markets with changing interest rate expectations throughout 2015, so macro funds generally don't do well in those environments. Long/short funds did well in 2012 and 2013, but sucked in 2011 and 2014-2015, so you could say that's more of the inherent risk with stock picking.
nice you have a good understanding of value and macro.
Social darwinism. It's a good thing.
Only the strongest firms survive, the lower one's that die lose their best trader or analysts or whatever employee and they are gobbled up by the surviving strong firms. They get awesome.
Great day. Practically exactly what has been happening to Middle Market oil companies recently.
volatility is good for traders..not so much for investors
hedge funds will still exist but only the smartest and quickest will survive
But couldn't you make the argument (granted our political landscape does not tilt massively in next year's election) that certain funds can manage to profit off of the market's current volatility? I know it seems rather simple but, for the sake of constant worry about the future of hedge funds; I don't see an end as long as the top ones continue to find ways to survive.
It's not just hedge funds getting beat down- it's active management in general. Will be interesting to see how funds do going forward, but it's not very encouraging for people interested in public markets.
Yeah. Three things driving shitty performance: 1) China worries / Fed posturing creating a lot of vol for macro guys, 2) everyone having loaded up on energy earlier in the year and getting face ripped off, 3) everyone else hiding in healthcare until the VRX / Clinton news, etc. Like others have said, this by definition must happen every so often and is what creates buying opportunities that we don't see often.
As for the article, complete bullshit sensationalist reporting that I'm sorry to say Bloomberg seems to be doing more and more of. Written like a CNBC anchor would to be honest. Obviously this is a competitive industry that will always have winners and losers. Nothing new here.
There was never much shine in the first place. I never get the idea of people wanting to work in something that seems to hold a certain value in the "community" while disregarding the fact that it's more of a apprentice --> performance based industry. Like stated; there's always trends, and there's always articles like this that "question the future of the industry". A lot of funds disappear, and quite a few do very well. There's no single variable or trend that can factually state that there is no future.
Next month's article:
"Are Hedge Funds the reason behind the growing list of billionaires?"
Articles like this are akin to investing based on quarterly earnings not long term fundamentals. Silly.
I can't wait for 2017/18/19 when hedge funds are crushing, especially in the distressed space, and all talk of the town is the great return of the hedge fund.
Did hedge funds crush it in the distressed space post-08? I know that there are certain funds that will post big numbers every so often, but on the whole I'm not convinced there are many financial managers fees worth paying vs. just putting my $$ in an index fund. I think the default pitch vs. that is that it is a diversification play for HNWIs, which I can't personally relate to but understand the rationale. Everything is cyclical, and I don't think HFs are going to ever go away, but I do think there has been a shift in how people view the fees they pay financial managers broadly for historically underwhelming performance, including HFs.
Agree. HF's aren't going away but there's too much competition looking for alpha for fee structures to continue like they once were. I think this will always be true to some extent due to over confidence on manager selection abilities. I do agree diversification has some value but that likely less than a lot of people think
Supply side of capital (i.e. the slow money) - will always see a point behind 'absolute return' strategies.
Demand side of capital - will always be able to exploit different strategies.
Everything but the (very cyclical) advisory side of an investment bank's business is being squeezed by regulation and lack of asset-class performance.
Hedge funds will always make money, because there will always be movement in asset classes (even if that means its just shorting the hell out of everything).
Hedge funds aren't dying and won't die because a hedge fund is a structure, not an investment strategy. L/S equity, macro, distressed, credit, multistrat, event driven, trend followers, etc. These are just some of the investment strategies that like to structure as a hedge fund. If you're asking if all of those are going away at once that'd be insane. Mainstream media loves to bash "hedge funds" when in reality a few blow up every year, but the underlying strategies aren't going anywhere.
Tons of funds did well last year ... have at least 3 buddies whos funds were up 15%+ on 2bn+ asset base.
Also this may be a good year to start a fund given valuations are coming in
2020 & 2021 have been better years than most would have thought for a lot of HFs... Index investing will implode at some point and active management will returrn to be in vogue when this happens... So I agree with some previous posters than things move in cycles and I feel we're reaching the end of this cycle.
Why will index investing implode?
Because most of the popular ETFs have an insane exposure to just a few names, so the diversification they used to offer is no longer true. If big tech crashes, the SPY of the world will crash along with it, and index investment will lose some of its appeal.
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