With soaring hedge fund shutdowns, and countless “smart money” asset managers underperforming either their benchmark or the overall market, 2016 is shaping up as the worst year for the hedge fund industry since the financial crisis. Actually, in some respects it is even worse than that: according to Eurekahedge, the number of hedge fund startups, which were surging a decade ago, have fallen off a cliff in 2016 and are heading for their worst year since 2000.
According to Bloomberg, there have been just 457 fund launches through the first nine months of this year, compared to 876 in 2015, citing Eurekahedge numbers. “The capital raising environment for newer launches is quite difficult to put it mildly and with existing offerings out there returning low-single digits over the last three years, investor appetite is quite selective to say the least,” said Mohammad Hassan, senior analyst at Eurekahedge.
But while launching a new hedge fund may be virtually impossible for a new generation of aspiring masters of the universe, at least until returns somehow return to their double-digit legacy norms observed during the industry’s heyday, what about those already employed by a long/short fund manager?
According to the latest report by Odyssey Search Partners, things there are not much better either. As Bloomberg writes, hedge funds portfolio managers are about to feel the pain from an estimated “massive” 34% reduction in their compensation. It would be the worst year for PMs in nearly a decade.
The news is a little better for those below the top level: professionals with seven or more years of experience see their total compensation declining by 14% on average for 2016, according to the Odyssey said in a report this week following a September survey of 500 hedge fund professionals.
Not everyone is expecting a pay cut: junior analysts with less than three years of experience expect their compensation to increase on average by 10 percent to $321,000. Then again, the youth is always most optimistic.
“2016 should prove to be a belt-tightening year,” according to the report. “This pessimistic viewpoint is justified, given the poor industry performance.”
There is another distinction, and an expected one: firms experiencing outflows this year are expected to pay 37% less in bonuses than those that had inflows, producing a payout closer to $288,000 compared with $394,000 for the better-performing funds, according to the report.
To be sure, even a “massive” pay cut for the highest paid industry will hardly evince much sympathy from the rest of America. Then again, after the pay cuts then come terminations, and as alpha creation continues to decline we expect the current wave of hedge fund closures and layoffs to accelerate.
For now, however, there is a silver lining, if not for finance experts then for those who know hot to program algos and speak in court: according to the report, hedge funds are expecting to hire more people with technology or legal experience as many funds are looking to improve data analysis and compliance, according to the report. As for the rest, we know that at least central banks are hiring.