Will Hedge Fund Gains Save Fund Managers?

November 11, 2011

After a long summer of discontent, the hedge fund industry is seeing a much needed sliver of hope that it may have turned the corner on its way to positive territory this year. Aided by a cooperative stock market, hedge fund indexes cut deeply into their declines in October and are in reach of positive gains for the year. The question is whether it comes too late to stem the bleeding of investor funds which accelerated to nearly $30 billion in outflows in September. With only a couple of months left, fund managers don’t have much time to convince investors that they have, once again, put the “hedge” back into their hedge funds.

hedge fund manager

Source: http://www.theptp.com/

Although the 2.46% gain (based on the Hennessee Hedge Fund index) was the best of the year, thanks to a sharp rebound in most risk assets, hedge fund managers still managed to evade the larger 11% gain posted by the S&P 500.

For the most part, investors seem willing to give their fund managers the benefit of the doubt, even as they’ve watched their asset values decline by as much as 50% this year (see “Can it get any worse for John Paulson?”) The $30 billion of September outflows, which was actually worse than what was projected, comes on the heels of near record inflows throughout the first part of the year. So, the vast majority of investors are voting with their assets to stick by their fund managers. The hope is that fund managers have finally found their footing so that they can more successfully navigate the volatility that is certain to remain in the market for the rest of the year. Another month of missed opportunities could spell disaster for hobbled funds that can’t afford any more outflows.

Even if they manage to complete their turnaround, it’s still has to be a year that fund managers would like to forget. After a year of unrelenting attacks from the public over “obscene” compensation, politicians wanting to balance the budget with a carry interest tax, and investors waking up to excessive fees, they may not be giving up their flak jackets any time soon. Public and political sentiment shows no sign of improving and investor expectations are only increasing.  It hasn’t been good year to be a hedge fund manager, and many will likely find that it’s just not fun anymore. Look for some more consolidation of the industry in the next year.


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