Here are the trends experts are currently seeing in hedge funds
The COVID-19 pandemic has changed the way hedge funds do business, from fundraising to investing and more. Some trends are here to stay, while others will change as the pandemic continues and eventually comes to an end.
Active management is back
Craig Bergstrom, chief investment officer at Corbin Capital Partners, said in an email that active management has returned in 2020, particularly fundamental stock selection. He said results across the industry are mixed, but the dispersion has meant that careful portfolio construction has been valuable.
“The performance of large-scale hedge funds has certainly been disappointing in recent years,” Bergstrom said. “Very low interest rates are a big part of this problem, but another key factor is clearly the costs of the funds, which have come down, but not fast enough, which means they are consuming too much of the gross return.”
He adds that it is not fair to compare hedge fund returns to stock returns because it is almost three times more volatile. However, in recent months, investment managers have finally started to find it easier to generate alpha.
“The right hedge fund portfolio, however, has been able to generate strong alpha and attractive risk-adjusted returns, which in our view remains very attractive in a world where potential fixed income returns are. very low, ”said Bergstrom. “Investors have focused a lot on performance, but that means they’re looking for returns; they take money from laggards and give money to top performers, so dollar-weighted returns are often good. worse than advertised. “
Fundraising capacity is a matter of “genealogy”
One of the issues some funds have this year is fundraising. Bergstrom said large companies have continued to grow, while small businesses have a harder time raising funds. Jason Meklinsky of Apex Group called the success of hedge funds in raising new funds a “question of pedigree.”
“There is an exaggerated gap between the fundraising success of managers with good backgrounds and their less established peers,” Meklinsky said in an email interview. “These funds have an above-average chance of a ‘critical mass’ launch. As a result, we are seeing fund inflows from both large caps and market boutiques, with mid-sized funds and those that don’t have a solid pedigree. struggling to attract investors.
Apex has seen a slowdown in the amount of funds raised and the overall average fund launch size is declining year over year. Meklinsky said general sentiment on the hedge fund allocation is positive for the coming year, but it is also overshadowed by the disappointing performance of the industry over the past 12 months.
Remote working is a challenge that’s here to stay
Bergstrom and Meklinsky talk about the challenges businesses are facing with the pandemic having closed many offices. Bergstrom said having to develop long-distance relationships has reduced fundraising for smaller funds.
“Developing new relationships in this environment is difficult, although there appears to be increasing comfort among beneficiaries for meetings and remote / video interactions,” he said. “On the operational side. , hedge funds face the challenge of balancing remote and face-to-face work.Working virtually isn’t perfect but it certainly works, so it will likely be a bigger part of the industry in the future. On the flip side, many of the investors we most admire have focused on getting back to the office, so there will be a balance to be managed. ”
Meklinsky said the pandemic has slowed down the due diligence process for the funds. Meanwhile, many managers are looking to control costs.
“Exacerbated by remote working, the funds express a desire to move most non-investment activities off the premises,” because of the benefits they see in terms of lower overall expenses for the manager and the ability to be flexible and scale up or down as required at any point in the fund’s lifecycle, ”he says. “Of course, as in other asset classes, the pandemic has slowed down due diligence processes for funds. In addition to the larger economic landscape, the regulatory regime for both US and non-US vehicles is currently expensive to operate. , especially at a time when funds seek to control costs. “
A look at 2021
The pandemic has probably changed the fund industry forever. Bergstrom believes remote working is here to stay.
“It seems likely that we will have more remote work, given its efficiency, although I always look forward to getting my team together in person,” he said. “I also suspect that video will replace at least some travel. If we see fewer customers in person, we will focus on improving our digital communications and be more creative about how we share ideas and content.”
In the new year, Bergstrom hopes that investment firms will continue to generate alpha and that hedge fund trends will be positive.
“We hope that the increasingly higher volatility and dispersion will create opportunities for fundamental managers to perform well and generate alpha, although we spend a lot more time thinking about how to position our portfolios to deliver attractive risk-adjusted returns, even if hedge funds are disappointing, ”he says .
ESG in 2021
Another trend that could continue for hedge funds in 2021 is the push towards ESG (environmental, social and governance) issues.
“We’ve been extremely focused on ESG and how the managers we work with approach it,” said Bergstrom. “Hedge funds have lagged behind other parts of ESG asset management, but we believe they will be more fully integrated into the HF business in 2021.”
He adds that climate change is a central concern as both risk and opportunity, but Black Lives Matter and diversity, equity and inclusion are also important.