The holidays are coming to an end People are supposed to be happy and thankful after spending time with family. When, then, is everyone I know on the buy-side so morose?
It’s been gloomy in finance for a few years now, but for some reason, this year feels worse than others. Everybody I talk to (that’s a lot of people) seems low. In finance, I admit there can be an issue with unrealistic expectations that make some people unhappy. - There are people who are unhappy because they’re only making $1.5 million dollars, when they think they should be making $3 million. It’s hard to feel bad for them, but there are genuine reasons for sadness too.
I work for a hedge fund and I speak mostly with other people at hedge funds. Here, it's a pretty miserable outlook. Some of my friends had a good 2019, but it’s hard to outperform the market’s 27% return. When a market is up this much, investors naturally question what they’re paying for.
As a result, investors continue to pull assets from hedge funds and to deploy them into other strategies, and fees continue to trend down. The combination of underperformance versus the market, declining assets, and declining fees is not a good one.
If you thought long-only investors had it better, you’d be wrong. Their performance is better since they get to hug the benchmark, but the outlook is still abysmal. I spoke to one friend at a long-only and he said that assets were largely flat at his firm. Think about that for a second. Performance is up ~25%, but assets are flat, meaning redemptions are completely offsetting performance gains! The shift from active to passive continues, unabated.
Before, I used to wish I worked at a long-only. You had job stability so even though comp tends to be lower, it was like an annuity. Now, it’s questionable how stable that job really is.
Finally, we have the sell-side. It hasn’t been good at the sell-side for over a decade now. MiFID II has already impacted budgets so it’s not an incremental headwind this year, but it’s not a tailwind either. When your
largest clients (i.e. hedge funds) aren’t doing well, that has to impact profitability. Every year, I see more friends on the sell-side either quit or get let go.
It's not all doom and gloom. Eventually, things will get better. When (hopefully soon) the market tanks, hedge funds will outperform and remind investors why they want to hedge. Eventually, the mix between active and
passive will stabilize, helping long-only investors. And when all this happens, the sell side will return to a bearable place again. That may not happen in the next 12 months, though.
Margin of Saving was created by an analyst at a multi-billion dollar hedge fund to help others learn how to invest and save.
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