''Don't bother joining the hedge fund industry''
Straight from Business Insider which I don't even like as a source for being too much reliant on click baits.
Yet:
Managers "don't get paid anymore," he said. "They work really hard hours, the stress is ludicrous, the amount of assets you are able to raise is not easy any more."Many of these issues are tied to a feeling that the industry has passed its golden years. Hedge funds generally are not posting the out-of-the-park returns they used to, and many worry that the investors are moving their money elsewhere.
"The lower returns are by design," he said. "When I left [the industry] it was at that moment that the hedge fund industry started switching to taking pension-fund money, and the pensions wanted it to look like a bond. They want low volatility, 8% returns. So that makes the big mangers get really rich, like Bridgewater, Brevan Howard and all these guys that have billions and tens of billions of assets. But nobody else can make money."
"People aren't taking risks any more," Pal, the founder of Real Vision TV and Global Macro Investor, added. "The old days of Julian Robertson or George Soros making 100% returns have gone."
Can any insider here confirm any of this?
It's not the first time I read something like this, at least this year, so I simply assumed it was a tough year; if we stick to what Pal says however, it's a dying industry. What went wrong?
Active management in general is under pressure... pressure from investors and regulators who want to see less fees, academics who point out that most active managers fail to beat their benchmarks, low interest rates and monetary policy driving down returns, a massive amount of money competing for a few compelling growth opportunities, etc.
This doesn't necessarily mean it's a "dying industry", however. Some argue these things happen in cycles, some argue this is a "new normal" in a low-return / slow-growth world... so compensation may not be as exhuberant as in the past and competition may be tougher, but I think the industry will find a way to adapt.
Lots of great answers on here. It's all true: the business is tougher than it was, it's harder to earn outsized returns, get and keep capital, etc.
It's like the Internet bubble of the late 90s, not that many of you would remember back that far, but when bubbles collapse (HF was a bubble, and perhaps still is, given the return profile that many of you point out), people believe it won't happen again. But, it almost always does.
Sure, there's pressure on active management failing to beat the market, but that has been the case for 40 years. Investors who couldn't get enough HF just 2 years ago today are resisting 2/20 fee structures, looking for permanent capital vehicles, etc. but who knows where the industry will be in a decade. e.g. the biz gets harder, people exit the industry, that creates more inefficiency, that leads to a resurgence, etc.
The real thing missing from all of this is, however, is: What do you want to do with your life?
Is HF only a job that is interesting if you think you can earn your billions, or do you actually love the craft of "trying" to beat the market?
One thing to be celebrated when "career bubbles" collapse is that the people who are left in the business are there because they want to be there, not because they perceive "easy" excess returns.
I work at a decent sized AM firm(>200bil AUM) with a focus on FI. We have pretty competitive fees (~30bp is the weighted average).
We under performed for the last quarter 2015/first quarter 2016 but have been crushing it since and have surpassed the bench in over 80% of our assets YTD. We still see lots of outflows from the MFs and plenty of fee compression from institutions. Our AUM actually grew this year but our revenue is lower due to a lower weighted average fees.
My concern is for my career in the long term there just isn't much growth especially since I am BO/MO.
If I was already a manager I wouldn't care much but I might not move up for a really long time. My plan is to save up and start my own business. I am just pissed I wasted 300 hours on the CFA L1 but it could be worse.
active management in fixed income matters so much, you just haven't seen it yet because we've been in a nearly 35 year interest rate decline.
with the lack of muni bond insurers, firms not keeping inventory, and the likelihood of rates either going up or going sideways, bottoms up credit research is going to be highly coveted. just wait for TLT to take a nosedive or credit markets to sieze up and CUSIPs start mattering and your AUM will double (assuming your shop is good), mark my words.
the math of bonds is against the index right now. TLT is up 15% and the yield is below 3, tell me mathematically how that makes sense. bond indexers are in for a rude awakening...
couple factors at play here
ETFs, underperformance, etc. has caused laggards without sticky capital to leave the industry and likely caused fee compression. My firm is one of the bigger distributors of alts and very few hedge funds command 2 & 20 from FoF and only a slight few can command those fees from us directly.
we've been in a 7 year bull run largely driven by multiple expansion, low vol, and falling interest rates. in a fed driven market where the best strategy was to buy SPY, TLT, then go take a 7 year vacation, the benefits of active management nearly evaporate.
funds get launched because everyone thought it was easy to make money in a bull market. I made a thread about Meredith Whitney a while back and I have to think that she was not an isolated incident. when you combine easy money from investors with a multi year bull market, it's no wonder why everyone thought they could be the next seth klarman (look at WSO threads for justification). more funds doesn't bode well for performance, so there could be some dragging down of average performance.
there's more, but basically my opinion is this: there will be times when active management is better than passive management, just like there are times when growth beats value and international beats US, it ebbs and flows. if you're not interested in your investments but hate paying fees, buy VT, never sell, just add money, and go to the beach.
however, if you believe, as I do, that there are certain strategies that beat the market over time (low PE, div growers, value, GARP, magic formula, etc.), and have the discipline and the interest to stick with it, I think you can do better. the important part is sticking with it. there will always be investors who think this way because they realize that people are lemmings and there are always opportunities. it will not look good all of the time, but it will look good over time. read "superinvestors of graham and doddsville," also read seth klarman's investor letters from the late 90s. no one would say he's a bad investor, but he looked like one for about 4 years (96-00).
finally, I often find that people who leave the industry are the loudest. I've never heard someone who's actively a manager saying "don't bother," it's because they see opportunities still and still think there's value. sure, he was able to retire at 36, but part of me wonders if he was really that good of an investor, if he'd feel the same way. he gets paid to get eyeballs on his website, so he needs to say things that drive traffic. always be aware of what someone's agenda is before you take their word as gospel.
in short, the industry will shrink as it always has, but active & passive management can peacefully coexist, hedge funds included. losers will die out, winners will carry on.
Have you ever thought about jumping to AM or HF?
there once was a time, yes, where I wanted to work for tweedy browne, first eagle, etc., but with a non target, non business major, late starter on internships, it would've been an uphill battle. and candidly, PWM gives me the possibility of a much longer career with roughly the same lifetime earnings but a better lifestyle.
the problem is even if we had audited performance numbers (borderline impossible because all accounts are a little bit different due to client needs), and you're Capital Group for example. who would you take: a 30yo PWMer from a non target or a kid from Cal or Duke with 3 internships? you're taking the kid every time. he's less expensive and less of a risk.
sometimes I think if I retire early I'll just open up my own shingle, run one strategy instead of broad allocation (dividend growers + muni bonds), but that'd be about the extent of it. I just don't have the interest to do anything but PWM.
I think the hedge fund industry is here to stay. Is it going to be harder to create alpha? Yes...But is it going to become obsolete? I don't think so. I think the reducing that 2% AUM fee will be beneficial, this will be less of a stab to an LP's heart during rough markets.
The Decline Of Hedge Funds (Originally Posted: 11/06/2012)
My friend works as a hedge fund administrator, and he's beginning to notice a slight increase in redemptions and liquidations for a few major (PE) funds in the past couple of weeks. In an article by CNBC, some well-known hedge funds are also closing up as fund managers are failing to beat the market. A forward redemption indicator by SS&C also measures a redemption rate of 3.76% of AUM this September, up from 3.11% of last year. Not based on any fundamentals, but this leads me to be slightly bearish in the short term, at least for the job market.
This article even suggests a possible structural change in the way fund managers are compensated when there are many other alternatives such as ETFs with absurdly low management fees. I like to believe that it's a sign of where we are in the cyclical cycle rather than a permanent change in how funds are operated. Funds move in and out in both good and bad times, and poor performers are now being weeded out. Fund managers shouldn't even be blaming the market. Correct me if I'm wrong, but isn't the point of a hedge fund is to make strong absolute returns regardless of market conditions? On a side note, Buffett liquidated all of his partnerships (100 AUM) in 1969 with an average annual return of 31% for the previous decade leading up to it. Surely, the timing of a liquidation is a telling of an investment manager's competency.
What do you think? Is this a short term trend that will last into the foreseeable future, or is the business model of a hedge fund really being threatened?