Tapping insights from more than 2,000 institutional investors and hundreds of hedge fund organizations, a third-party marketing firm specializing in alternative investments has outlined several key trends to watch out for in 2019.
According to Don Steinbrugge, head of Agecroft Partners, the industry should be approaching a saturation point, reported ThinkAdvisor. Reaching peak levels in each of the past nine years, the space has grown to more than US$3 trillion in assets under management; much of this has been due to performance in recent years, with only a modest amount coming from new capital.
“Although we expect industry assets to remain fairly stable, we anticipate instability at the strategy and manager level,” Steinbrugge said, noting that most new assets invested in hedge fund managers come from redemptions from other managers.
He also identified a shift from maximizing returns to protecting capital. The February spike in volatility last year, he said, prompted investors to rethink their allocations to various strategies; continued interest-rate hikes, trade-war tensions, and the fourth-quarter selloff in equities have also contributed to some investors’ move to diversify away from the capital markets.
The transition to a risk-off mode, he predicted, will also cause assets to flow out of the long/short equity sector. Funds with long net exposures, as well as funds focused primarily on large-cap stocks in developed markets, will likely see outflows. Long/short equity funds that focus on small- and mid-cap stocks less followed by Wall Street, companies based in Asia, and sector-specific strategies, however, are expected to see an increase in demand.
Another result of 2018’s volatility, Steinbrugge suggested, is magnified performance dispersion among funds pursuing similar strategies. Underperformers, some of which have distinguished themselves with strong brand names and long histories of success, will “need to reinvent themselves in the arms race for alpha.” Otherwise, they should prepare to face investor outflows that could result in the fund closing or converting to a family office.
Related to this performance dispersion is increased use of performance fees. While most investors do not mind paying a higher management fee in exchange for good performance, investors are increasingly differentiating between alpha-driven and beta-driven performance. That spells growing use of hurdles for performance, which may vary from the risk-free rate to performance above an index for long-biased managers.
Steinbrugge also predicted a greater role of technology in client service. Aside from enhancing the investment process, he said it is also being used by hedge-fund managers to make more information more accessible. They will also conduct more quarterly and annual investor reviews, educational sessions, and prospect meetings using webinar technology, he added.
“Although video webinars are not quite as effective as face-to-face meetings, they can offer an element of communication and understanding gained through human interaction that can be easily lost via email or phone,” he said.
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