HF Industry Dying?

Spoke with 2 MDs at a top BB (GS/MS/JP) recently and both said that HFs have been very stagnant for the most part and it isn't as appealing as it once was (also have seen a lot of turnover in their group). They work in the AM arm and focused on hedge funds for decades so I feel they know what they're talking about. Curious what your thoughts are if it's just them being cynical or not. I'm interested in potentially going over to a credit hedge fund and working my way up.

Comments (57)

  • Analyst 2 in IB - Cov
Aug 2, 2020 - 7:41pm

Thanks for your response. Saw a guy on another thread who's in his early-mid 30s and claims he has 6 million in deferred compensation (500k in investments and 1M in real estate). Does this sound legitimate? Is comp at a credit hedge fund similar to a traditional hedge fund? I'm not familiar with how comp is structured at HFs but would like to learn if you could shed light on this.

  • Investment Manager in HF - Other
Aug 2, 2020 - 9:00pm

I was the one who posted on the other thread. It is an outlier (not trying to be arrogant, I just have many friends in the industry). Most HFs don't make it, let alone people within a HF.

As another poster said, you can make good money early on (200-300k for a new hire) but it is high stress, extremely competitive, and most people don't have long careers there. A lot of people cap out at $500k if they are good but not great. If you have a stable fund that's a great income, but to get much higher than that, you start getting into the top 5-10% of "top" funds (I.e. funds with good economics, stable AUM, returns, client base, etc), it isn't that many people.

I got into a HF relatively early, so you have to understand I have 10 years of experience, most people who do IB then go to business school then PE. So by the time they are entering PE (~$300k) they are ~26 and usually with business school debt or depleted savings due to school.

Aug 2, 2020 - 7:53pm

What would you say is a typical total comp for someone in a HF? If someone saved conservatively, how much would you expect someone to have saved by early 30s if they worked for a HF?

Aug 4, 2020 - 3:20am

It's an extreme outlier for prospective monkeys who do not have the intellect and work ethic to get that far.

It is not an extreme outlier for people who have spent a few years on the buyside with some type of decision making responsibility related to p&l. Basically everyone at a successful fund that has been around for 5+ years probably has averaged at least 2mm in comp a year ? So that gets you to those numbers pretty quickly, especially when he was saying that the 6mm is pre-tax.

Aug 2, 2020 - 8:10pm

Nobody can tell you what a "good number" to have saved up is. It is all relative to your compensation, lifestyle, and priorities.

You can live frugally and have 5 million saved up, or. maybe prioritize going on trips, traveling the world, eating out, etc and have 2.5 million saved up.

This is one of those questions that can't be answered by asking others.

Aug 2, 2020 - 8:53pm

Starting comp is something like 200k-300k. If you can keep a hf job, depending on how much stress you want 400k-500k is doable. To be clearing a mil consistently, you need to be extraordinarily good at your job and connected to some big PL stream in some way.

For every one person clearing a mil consistently for multiple years, there are probably 10 or 20 that enter with unrealistic expectations and end up leaving the industry to try something else (bschool, startups, etc). Thinking about what your strengths and weaknesses are and whether your skills/interests would be suited for a particular job are a much more useful mental exercise than dreaming about comp.

Aug 2, 2020 - 10:16pm

Well take a look at this forum. I think that the fact that there are kids laying out their path like the following "okay I'll do 2 years in Ib and then work at a hedge fund" is really telling of how mediocre and overcrowded the space has gotten. As if a 2 year stint in IB is all that warrants a career as a great investor. As if it's somewhere everybody lands 'just because' but they don't know you have to fucking preform.
Was it ever really the promise land though ? A serious question for any more experienced monkeys. I think the number of funds that can outperform really hasn't changed, it's just that the space became too crowded (thus, proportion of good:bad funds has shrunk exponentially). I don't think the hedge fund space was ever meant for this many players, and the number of players in the industry will revert back to a much smaller number as a result. The vast majority of hedge funds we see now, in my opinion, are simply keeping the machine well oiled, so to speak. Aka keeping markets efficient. The funds that are truly good will always squeeze out alpha.

Aug 3, 2020 - 10:08am

Its a tougher environment for anyone who isn't generating real alpha. I think the most accurate way to look at it, is that its moving to more of a barbell shape distribution. On one side you have real alpha generators (high fees for real outperformance) and on the other side you have index funds (zero outperformance and almost zero fees).

Previously, there was more of a middle . . lot of mutual funds charging medium fees for minimal alpha, or hedge funds that were claiming outperformance but not delivering. As allocators have gotten smarter, the middle has hollowed out.

For an example, look at smart beta. 3-5 years ago, smart beta was the hottest thing in the industry and the ultimate "middle" product. Charge people 30 bps for the hope of slightly beating the index. Now people are starting to call bullshit on it. Still very much around but AUM is down at places like DFA and AQR because allocators have become more sophisticated and want to know why these strategies are likely to deliver alpha in the future, which they aren't.

I know smart beta gets outside HFs but wanted to use it as a clean concept to illustrate the barbell.

I think the 2 MD's may be technically right, but its the wrong attitude to have. If you believe with high conviction you can deliver outperformance, you should be in the industry. And if you don't believe that, you shouldn't.

Aug 5, 2020 - 9:10am

They aren't being cynical. We can try to quantitatively examine this by looking at the net flow of capital and fund launches vs shutdowns in recent years. Many prime brokers publish such research, and these figures regularly make their way to Bloomberg and WSJ so you can simply google them and see for yourself. Both metrics support their pessimism.

However, you should also put what they say against the larger context. This industry like many others is cyclical in nature. The years immediately after the GFC was the rising phase, and the last few years happened to be the down part of the cycle. This phase might persist or it may turn soon, nobody knows.

Aug 5, 2020 - 2:08pm

There are still plenty of guys making 7 or low 8 figures in there late 20s / early 30s. Things are alive and well in that sense. I think that's the goal for most monkeys on this site right?

  • Quant in HF - Other
Aug 6, 2020 - 3:11pm

Very uninformed comment. Jane St and Citadel (hedge fund) are in completely different busineses. Better to compare Citadel Securities and JS.

500K out of school is not recurrent, it usually comes with 150-200 sign on. After that it is really 300-350K. And in those places there is no "unlimited" upside -- people are often capped at 700K-1M.

Aug 6, 2020 - 9:01pm

You realize that the quality of life does not measurably improve beyond 400k/year (per an AmJournal of Psych paper). Even if you are capped at 700k/year is that really so bad? The primary attraction of working in HF at least in my opinion is that you get to experience the best lifestyle straight out of college, you immediately enter the 1% without having to work too much (all the work happens during undergrad). Again you start at the top when it comes to happiness/fulfillment. Does anyone actually want unlimited gains? There is a point where you have too much money, so much so that you become famous and begin to compromise your privacy.
FYI isn't JS = Jane Street and Citadel = Citadel Securities. They are the same right? Or is there some other lesser known fund called "Citadel".

Aug 6, 2020 - 9:36pm

Hedge funds are a niche, and always will be, the opportunities are too small for institutions to allocate 50% of their capital. However, if you can generate alpha, few do, you'll be able to continue charging extreme fees.

What your seeing today is a consolidation capital moving away from those without alpha.

Aug 6, 2020 - 11:25pm

Going back to the OP... I'm not sure the HF industry is dying, but the easy money has mostly been made. The industry is crowded (too crowded, I would say), fees (management and performance) are generally coming down, and its getting harder and harder to start your own shop. In short, like someone else above has probably said, the industry is evolving. It's no longer that "sexy, edgy" industry where someone can rock up to a fund and make a ton of money early on. Investors (LPs) can be far more picky and demanding, whether its information requests, certain operational procedures/standards, returns targets or just plain old fee levels.

Generating "alpha" whatever that really means is getting harder and harder and at least from what I see, life-cycles of people/funds are getting shorter and shorter. The big funds are hoovering up most of the talent and have the best resources. Then there are some great niche-y places that do well but can't scale. Then there is everyone else....

I used to do Asia-Pacific PE (kind of like FoF). Now I do something else but happy to try and answer questions on that stuff.
  • 5
Aug 7, 2020 - 1:03pm

Then there are some great niche-y places that do well but can't scale. Then there is everyone else....

Correct me if I'm wrong, but isn't that the point of a hedge fund? A small, nimble investment vehicle with a certain capacity constraint due to a niche strategy? Is that not where the money is (for somebody who wants to work at a hedge fund)? I've haven't heard of any behemoth fund that preforms exceptionally well. Sure you have the quant-based MMs, but those are all running different strategies, so I'd be hardpressed to call them A fund.

Aug 7, 2020 - 1:58pm

I must have missed where in the definition of HF it says they must be "small". Chase Coleman at Tiger Global must've also missed it. Dont think Soros kept his bets small either back in the 80s-90s..

If you find big opportunities where you can deploy billions of dollars, why would you limit yourself to only tens of millions?

Most Helpful
Aug 9, 2020 - 5:35pm

My humble opinion having spent ~4 years in the industry...

  • The rise of passive investing / ETFs has and will continue to be a headwind. Allocators and investors will not be content with average performance when it can be replicated at a lower cost.

  • The low interest rate environment and until recently stable economy has been a great tailwind for the private equity industry. On paper, PE funds have been an attractive alternative to hedge funds and have delivered attractive risk adjusted returns. The competition from PE over the past decade is far greater vs the 90s / 00s.

  • During the 2000s hedge funds did have a good run and delivered attractive returns, partially driven by the fact that value strategies worked well (and I believe higher short rebates which aided returns). Post 2008, market leadership has been concentrated to a subset of tech names, volatility (until recently) has remained low, and traditional value investing has underperformed.

The combination of these factors has led to a relative outflow of capital from hedge funds. Simply put, new competition, high fees charged by hedge funds, and lackluster performance have greatly hurt the industry. Hedge funds have not replicated performance delivered in the 2000's and allocators / investors have put average hedge funds on a short leash and have put downward pressure on fees.

That said, if you're smart and can deliver alpha, investors will still allow you to charge hefty fees for outperformance and there are still a subset of funds which continue to deliver. The market will always reward and allocate capital to talented investors. If you believe you can deliver alpha there is room for you in the industry and you will likely succeed.

In addition, it's not theoretically possible to have a market completely filled with passive ETF ownership - there always needs to be active investors in the market taking advantage of price dislocations. Though if you can't deliver performance, good luck charging significant fees.

While the outlook may seem bearish, there are a few reasons why hedge funds can come back in favor (though gone are the days of unestablished funds charging 2 and 20 on new money)....

  • A rising rate / inflationary environment and higher market volatility should in theory make hedge funds more attractive and increase their probability of achieving outperformance. Private equity vehicles also become less attractive given higher costs of financing debt.

  • If we see a paradigm shift from limited market leadership (ie FAANG and growth tech), to value based strategies outperforming again - this would be beneficial to hedge funds.

  • I also think the PE universe is too crowded with small / unproven funds launched in the past decade. A rising rate environment / a recession such as this one will test their skill. Assuming we see a wave of portfolio company failures, investors will not enjoy the long workout process and come to appreciate liquidity available in the public markets.

Aug 9, 2020 - 5:43pm

This is very helpful, thanks for the thoughtful response. Some questions for you:
1. What are examples of subset of funds that have continued to deliver?
2. Why do you think "value" has underperformed since 2008?

  • Analyst 2 in IB - Cov
Aug 9, 2020 - 5:44pm

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