Signs of life are cropping up among two fund strategies that suffered conspicuous damage during July-August - quantitative equity funds, and credit hedge funds.
In the quant equity space, sources say the vast majority of funds have recouped their midsummer losses and are back on track to record solid positive returns for the full year. In the credit space, some funds continue to endure illiquid conditions and portfolio markdowns for high-risk debt holdings, such as sub-prime mortgages. But other credit funds sidestepped the sub-prime debacle. Now, they are expanding in an effort to scoop up bargains amid the wreckage.
That portends a hiring pickup that is already becoming evident, says George Yulis, principal at Rothstein Kass Executive Search Group.
Yulis says credit market repricing has created a lot of value in the marketplace. As a result, many hedge fund firms are "being opportunistic right now," he says. They're raising cash earmarked for new fund vehicles that will buy debt at a discount in coming months.
New Searches Seen
Since late September, Yulis reports seeing both credit opportunity funds and long-short equity funds launch "three or four brand new searches" for CFOs and senior operating executives. He expects such activity to pick up in coming weeks, as new funds that aim to start trading in January assemble back-office support teams. "It will increase hiring potentially in the tail-end of the fourth quarter or the first part of the first quarter."
AlphaWorks, a new quantitative equity fund started by former Highbridge Capital executive Ron Resnick, recently hired a chief investment officer and two other investment personnel. Chief investment officer and portfolio manager Ivan Feinseth and analyst Michael Donohue were hired from Matrix Investment Research, and risk officer Mark Smith was hired from SAC Capital, according to FINalternatives, an industry publication.
Three further reasons for optimism: most funds performed strongly in September; proposed legislation to raise taxes on alternative investment firms is reported to be all but dead for this year; and a range of secular forces are driving institutions to step up allocations to alternative investments including hedge funds.
Performance Rebound, Asset Inflows
After losing 1.5 percent on average in August, hedge funds overall returned 2.98 percent after fees in September, based on an index of 2,000 funds tracked by Chicago-based Hedge Fund Research. A separate hedge fund index compiled by Hennessee Group returned 2.26 percent in September, following an August loss of 1.31 percent.
"Fund performance in September was up across the board, across strategies," observes Yulis. "A hedge fund is supposed to make money in volatile markets. Whatever correction happened in the first part of August has for the most part been made back." He estimates that 2007 total compensation for hedge fund accounting and operations staff will exceed last year's levels by an average of 15 to 20 percent .
The broad-based rebound also is one more reason to expect investors will keep channeling money into hedge funds. And that's good news for employment in the sector, according to Yulis. "As the money keeps coming in, you're going to have growth, and with growth you're going to have hiring."
A recent Citigroup survey of U.S. and European pension managers found the average weighting of alternative investments was slated to climb from 14 percent today to nearly 20 percent by 2010. That translates into an added $1.2 trillion inflow over the next two years, according to Wednesday's New York Times. At the same time, endowments and foundations also continue to boost their already high allocations to hedge funds and private equity.
Not Everyone Bounced Back
To be sure, there have been high-profile casualties. Fund industry pioneer Victor Niederhoffer was forded to liquidate his flagship Matador Fund in September after losing more than 75 percent, the New Yorker magazine reported in a lengthy profile in its Oct. 15 issue. Goldman Sachs reportedly reduced positions and leverage in its quant-driven Global Alpha fund in mid-September. At the time, the fund was down 33.4 percent year-to-date, including a 22.7 percent loss in August alone. In the credit space, Ellington Capital Management, reported to be the largest U.S.-based fund that focuses on mortgage securities, suspended redemptions and withdrawals from two of its funds citing a sharp decline in liquidity, the New York Post reported last weekend.