As hedge funds continue their ‘monumental struggle’ to outperform passive investments and market indices that have provided impressive and steady double-digit returns over the last decade to earn their modest billions in fees, analysts in the industry – especially those at the mid- and senior-level – are having trouble finding, and keeping, work.
A prime example is David Goldburg, the title character in a Bloomberg profile of the deteriorating hedge fund environment. After working on Goldman Sachs’ prop desk, managing money for Michael Milken and failing at his own attempt to start a hedge fund, he couldn’t even find a job for one simple reason: at the not-so-tender age of 55, and with his experience, he was just too expensive.
That’s why instead of spending high 7-digits (or more) to retain “experienced” talent, hedge funds are instead hiring several younger analysts for the same price of one senior analyst, a process being called “juniorfication”.
There is a good reason for that: despite the S&P rising modestly in 2018, hedge funds have posted deplorable returns this year. In fact, as the Deutsche Bank chart below shows, hedge funds have generated no alpha (or beta for that matter) over the past 4 years.
Goldburg has been swept up by the turmoil gripping the hedge fund space, where analysts as young as 30 are facing an existential crisis in a changing Wall Street where capital markets no longer function without HFTs and central bank intervention. He told Bloomberg:
“It’s pretty brutal out there. If you have more than 15 years experience, and you want to transition to something else or want that next level of opportunity, there’s never been a worse time.”
He has a point: in addition to miserable returns, Bloomberg adds that automated trading, a world awash in data and passive investing have made stock pickers less influential. Hedge fund fees are down, making analysts targets for cuts. European regulations (thanks MiFid) have put researchers out of work. And in a 10-year bull market juiced by the Federal Reserve’s low rates and bond buying, insights more expensive than “buy the dip’’ simply cost too much.
In short, the industry is starting to contract, and analysts – those middlemen who make the 2 and 20 model possible – have no idea how to respond, especially as the growing prominence of (cheap) machines, makes some of their once key tasks no longer important enough to guarantee them work.
Meanwhile, in the last three years, nearly 400 more hedge funds around the world have closed than opened, according to Hedge Fund Research. That means not only are there more people looking for work, there’s little or no movement in existing jobs according to Bloomberg. This means that senior analysts who in years past would’ve gone on to start their own funds suddenly find themselves stuck (assuming they avoid getting fired) so there’s stagnation on the organizational chart.
The surviving so-called single-manager firms, even the ones managing tens of billions, are running leaner, said Ilana Weinstein, founder and chief executive officer of IDW Group, a hedge fund recruiter.
“If we think about the death of the analyst, I think you have to go up one level and talk about the death of most hedge funds,’’ Weinstein said.
To be sure, few analysts are in dire straits. Many of the senior ones were, or still are, making mid-to-high six figures, with plenty of upside in a good year, although 2018 is shaping up as the worst years since 2015 when the global stock market – if not the S&P – experienced a bear market.
But, as Bloomberg notes, many analysts also facing something worse: the panic that comes with realizing their career aspirations will never be attained. They may never make partner or run their own firm. They’re stuck.
And then there is the greatest shame of all: getting laid off, as Balyasny just did when as we reported last night, it laid off 20% of its employees after losing $4 billion in 2018 between poor performance and redemptions.
Those lucky ones who do keep their jobs, are starting to come to terms with the fact that they may not wind up progressing by starting their own firms – which is where the big money has always been – or making partner at their current job.
As if they didn’t have enough to worry about, offshore competition has been increasingly pressuring hedge fund workers, offering far cheaper alternatives half way around the globe. Software companies stocked with former analysts, like Linedata, are popping up and making an impact on the industry.
Jonathan Shapiro, a Linedata senior director said: “They’ve let people go due to their assets shrinking. We provide them with someone who’s just as qualified and is ready and eager to do that work for a fraction of the cost.”
As for Goldburg, who finally found a job outside of the hedge fund world (ironically, inside the “hot, hot, hot” du jour pot industry), he decided to project his personal sentiment to all his former co-workers : “everybody’s miserable and everybody’s trying to grind it out. Everyone wants that better opportunity and that better job, but they don’t exist. And no one wants to leave their existing seat because if you leave your existing seat, it’s like musical chairs – you might not be able to get another seat.”