According to this recent article in the Institutional Investor, hedge funds are enjoying their best year since 2009. This statement is based upon data from Preqin, which touts itself as “the alternative asset industry’s leading source of data and intelligence, covering private equity, hedge funds, real estate, infrastructure and private debt.”
What It Means
While it is true that gains have been in positive territory through the first half of 2017, the cumulative gains of 4.87 percent are not getting anyone too excited. Twelve-month gains, on the other hand, are borderline respectable, coming in at 10.91 percent. It has certainly been some time since hedge funds, on average, have returned double-digit gains. June marked eight straight months of positive gains for the industry.
These gains, coupled with positive inflows, suggest that the hedge fund industry is regaining not only its footing, but also its credibility as an alternative investment option to the broader investment community.
What It Does Not Mean
The hedge fund industry is in no position to sit back, light up a fat stogie, and congratulate itself a job well done. There are six months remaining in 2017 and—did we say that 4.87 percent wasn’t terribly exciting? Clearly, this is not the time to spike the ball because the end zone is still fifty yards downfield.
Rather, hedge fund firms should take advantage of this good news by redoubling their marketing efforts in order to capitalize on their current streak of success. This may be an opportunity to persuade a pension fund, or two, to return to the fold.
The Fly in the Ointment
It is no secret that the preponderance of these gains rests in long/short equity strategies, which flourish largely in response to the Trump administration’s grandiose tax reduction and tax reform agenda. The gains of the next six months are in peril if the administration fails to bring its agenda to fruition.
The fiasco that has played out thus far in the administration’s effort to repeal and replace the Affordable Care Act (aka Obama Care) should give one pause with regard to hedge fund gains over the remaining six months of 2017. These future gains rely heavily on a continued bull market that has the potential to evaporate if the administration fails to pass promised tax reductions and reforms.
Hedge fund managers should take heart in the fact that Institutional Investor chose to cover this in such a favorable light. It may be a sign that relationships with pension funds, endowments, and others are on the mend.
The industry has had a decent run through the first half of this year. Hedge funds that hedge will realize the opportunity to enjoy an equally successful second half. Those who do not, are at risk.
At any rate, this is not the time to increase management fees and it is certainly not the time to raise performance fees.