By Donald A. Steinbrugge, CFA, Founder and CEO - Agecroft Partners, LLC The hedge fund industry is
dynamic, comprising numerous strategies that attract varying degrees
of interest over time. Demand for each strategy is impacted by
many variables including capital market valuations, expectations of
economic growth, market liquidity and risk appetite among others.
Industry professionals spend a great deal of time analyzing these
variables in order to identify which strategies they believe offer
the best opportunities for outperformance. In this paper,
we share some data and thoughts on where investors are focusing their
time and resources starting with a brief overview of
developments year to date. 2020 has been one of the
most volatile years for the capital markets over the past century.
The year began with questions looming about the sustainability of the
seemingly ever-rising equity markets. That uncertainty
accelerated dramatically at the end of the first quarter.
Equity and credit markets experienced material market value
declines in response to the expectation of a sharp economic
stall instigated by COVID-19. Generally, most hedge fund strategies
performed in line with investors' expectations. Still, some
less liquid fixed income strategies that were not properly hedged
sustained large, unanticipated, drawdowns leading to large
redemptions. In some cases managers imposed gates and suspended
redemptions. A flight to quality by investors combined with a
disproportionate amount of time required to address fund "blow
ups" resulted in the postponement of the majority of new hedge
fund allocations. Entering the second quarter,
the response of central banks around the world, in the form of
massive monetary stimuli, drove nearly immediate, strong recoveries
across the global capital markets. As a result, a large portion
of world sovereign debt is trading close to 0% at mid-year.
Concurrently, most equity markets are trading at valuations well
above their historical averages, by the belief that monetary
stimulus would result in a quick rebound in economic activity. As the summer comes to a
close, many of the drivers of volatility remain unchecked including
the spread of Covid-19, the US trade war with China, the US election
and massive increases in global debt. The big question is, how
are investors processing these uncertain variables and what is the
impact on their investment thinking? One way to address this
question is to ascertain which strategies are attracting current
investor interest. As of last week, nearly 300 "approved"
investors are registered to participate in the upcoming
Gaining The Edge - Global Virtual Cap Intro event. In the
registration process, they completed a detailed survey about what
type of strategies and managers they are interested in meeting. Of
the investors completing the survey:
33% are institutional
investors(including large pensions, endowments, and foundations);
9% are advisors and
OCIOs;
36% comprise family
offices, multi-family offices, and high net worth individuals;
22% are funds of
funds.
We
believe this survey contains high quality data and provides an
accurate depiction of current demand across the hedge fund industry.
This is both a function of the composition of investors participating
in these surveys and that these preferences will be shared with hedge
fund managers as part of the meeting scheduling process. From the survey data, we
share the following observations: - Investors were first asked
to list their current strategies of interest. Long/short equity
captured 65% of respondents, the largest share among all strategies.
This indicates a positive change in investor sentiment regarding a
fund manager's ability to generate alpha in stock selection.
Long/short equity has been losing market share for a number of years
in the hedge fund industry and this data suggests a potential
reversal of that trend. - Multi-strategy and event
driven showed the second highest level of interest at (57%). This was
followed closely by equity market neutral (54%), global macro
(53%), special situations/specialty financing (52%), distressed
(51%). - The increased interest in
global macro, compared to a few years ago, indicates investor
confidence that this strategy can take advantage of the increased
volatility. More importantly this increase, along with the
high level of interest in equity market neutral strategies,
further supports the trend of increasing demand for strategies that
are uncorrelated to the capital markets. Driving this trend are a
combination of reducing portfolio tail risk and institutions shifting
assets away from low yielding fixed income to a diversified portfolio
of uncorrelated hedge fund strategies in order to enhance returns.
Other strategies that will benefit from this trend include relative
value fixed income, short term CTAs, and reinsurance. - The interest in distressed
and special situations shows an increased willingness by investors to
consider less liquid strategies along with a blurring of the lines
between hedge funds and private equity as investors consider both
structures to access these strategies. - A few niche strategies that
are beginning to gain interest include cryptocurrencies at 21% and
cleantech/Impact investing at 29%. Below is a full breakdown of the
survey results. Strategies of
Interest:
Asset Based Lending (ABL)
|
31%
|
Cleantech / Impact
Investing
|
29%
|
Convertible Arbitrage
|
40%
|
Cryptocurrencies
|
21%
|
CTA / Managed Futures
|
30%
|
Distressed
|
51%
|
Emerging Markets
|
49%
|
Equity Market Neutral
|
54%
|
Event Driven
|
57%
|
Fixed Income
|
43%
|
Global Macro
|
53%
|
Long / Short Equity
|
65%
|
Merger Arbitrage
|
36%
|
Multi-Strategy
|
57%
|
Options / Volatility
|
38%
|
Private Equity
|
33%
|
Quant / Stat Arb
Strategies
|
42%
|
Real Estate
|
24%
|
Reinsurance
|
24%
|
Short Bias
|
20%
|
Special
Situations/Financing
|
52%
|
Structured Credit
|
43%
|
Other
|
14%
|
In addition to indicating
strategies of interest, investors were also asked to indicate the
minimum fund size to which they would consider making an allocation.
Of the respondents, 41% would consider new fund launches and an
additional 23% were open to funds with less than $100 million. 32% of
investors said they would consider funds between $100 million and $1
Billion and only 4% said they required a fund to be $1 billion or
bigger. They were also asked about the minimum length of track record
with 43% willing to invest with less than a one year record and 71%
less than a 3 year record. These results were somewhat surprising,
considering institutional investors represent almost one-third of
those participating in the event (and this survey). However, this
data confirms other indications that the minimum asset requirement
for various investor types has declined over time and especially in
the past several years. This may be, in part, attributable to the
significant investment large pension funds have made into improving
their internal processes. A majority have built out their research
staffs and, in so doing, have increased their confidence and
comfort with investing in smaller and emerging managers.
As we head into the 4th
quarter, we anticipate an increase in hedge fund allocations due to
pent up demand from earlier in the year. This survey should
provide good guidance on the strategies to which assets will flow.
Additionally, as most
investors and managers have become comfortable using Zoom and
other virtual meeting providers, most will adopt this technology as
part of their ongoing due diligence process. It will likely become a
highly used tool to facilitate introductory meetings. In some
cases, as we have already seen, investors may use virtual
communication to facilitate their entire due diligence process.
|