The Choice for Elite Portfolio Managers

Yahoo - September 27, 2016

Hedge fund CIO explains why returns aren't what they used to be

Generally speaking, it’s been challenging for hedge funds to beat the market for the last couple of years.

Ryan Tolkin, the chief investment officer of Schonfeld Strategic Advisors, pointed out one critical change in the hedge fund landscape that’s affected performance.

“I think when people speak about hedge fund performance, they’re talking about a broad universe of hedge funds. I think there has been pockets of out-performance and pockets of under-performance across the hedge fund space,” Tolkin told Yahoo Finance in an interview.

The hedge-fund industry consists of 10,000-15,000 funds, according to various estimates, and they manage just a little under $3 trillion in total assets.

He continued: “I think one of the things that’s happened to hedge funds over the last few years is the amount of assets that has flown into them has caused targeted IRRs, the intended rate of returns of hedge funds, to go down due to the types of investors that are currently invested.

“In the past it was large family offices and private wealth clients who were the main investors in hedge funds. Today, that’s changed to endowments, sovereign wealth funds, pension plans. What their intended returns for hedge funds are very, very different than the past.”

Schonfeld is a multi-strategy fund that manages in excess of $12.5 billion in gross market value. The fund—which has quant, fundamental equity, and tactical strategies—takes a market neutral view, meaning it’s indifferent to whether the market goes up or down.

Tolkin noted that quantitative hedge fund strategies have been a bright spot in the last few years, but even they vary as a group.

“I think quant strategies in general can mean several different things—there are quant strategies that fall in the risk parity bucket, there’s quant strategies that fall within the volatility targeting bucket, then there’s the more traditional statistical arbitrage strategies which is more similar to the types of things that we run,” he said.

He sees both a secular and cyclical trend in the space — the secular being the improvements in technology and the secular being the pockets of out-performance that have attracted investors.

“In terms of out-performance, I would say quant strategies overall have done rather well over the last several years which obviously has led people to chase returns as kind of a normal human behavior. I would say that phenomenon is not terribly surprising. But the other thing is like many other industries as technology continues to improve and as computers are doing more and more things — the fact that trading is more automated and more quantitative in its fashion is not terribly surprising. I think you have kind of a secular and cyclical trend going on.”

This of course has changed the profile of the hedge fund analyst compared to five or 10 years ago. Tolkin noted the analyst today would need “strong mathematical skills, programming skills, very good pattern recognition, the ability to have a passion and love not only for the markets but research, and discipline in that research to develop a repeatable process.”