Digiterre’s Rajesh Jethwa is named in the top 30 of the 2023 CIO 100
What’s the outlook for the hedge fund industry in the year ahead? The industry is constantly evolving with change always just round the corner. Digiterre summarises what we see as the top ten trends for hedge funds over the months ahead.
Brexit and the US mid-term elections this year will be just two of the upcoming events favouring global hedge fund volumes and activity, contributing to the overall growth rate of 5.5% in 2018 forecast by Agecroft Partners. 2018 is very likely to see a continuation of the hedge fund growth witnessed in 2017 and be a year of macro investing. An estimated $1trn of debt maturing in Europe, the Middle East and Africa will boost the estimated $5trn in dry powder (cash and liquid assets) available as investors seek alternatives to passive low-cost investment strategies. (Bloomberg News, Agecroft & Mercury)
Another extension, even acceleration of 2017 activity, will be greater exposure to Asian and developing markets. And especially to the giant economies of China and India – both driving for greater openness to the rest of the world and a reduction in their previously stifling bureaucracies. Hedge funds such as Pharo, Bluecrest and Adar have recently proved the returns possible from emerging markets in stark contrast to some players more exposed to developed markets. Asian markets also typically offer lower P/E multiples, higher volatility and less institutional ownership – all signs traditionally good for hedge fund investment. (Mercury & Agecroft)
This sector is bound to grow playing a growing part of diverse, rather than single investment strategies. Whilst it’s still very early days, we think it will continue to experience huge innovation, evolution and exponential growth and will ultimately end up as a commonly used consumer currency. Cboe has already announced the commencement of bitcoin futures trading. There are already over 120 hedge funds focused on the area. Commentators like Agecroft expect the number of hedge funds involved in cryptocurrencies and blockchain to at least double or treble in 2018 alone. Whilst future growth is forecast in the overall industry, at the same time you can’t ignore the significant caution advised over bitcoin, its largest player, who many see as having been bid up by excessive hype and speculation into potentially one of the largest financial bubbles in history! (Mercury & Agecroft)
2018 is likely to see further hedge fund investment growth in reinsurance stocks due to expected price increases driven by the hurricanes of 2017. Furthermore, the earthquakes in Mexico and wildfires in California mean that 2017 could even be the worst year on record for insurance losses. Munich Re and Swiss Re, the world’s biggest reinsurers, have said they expect reinsurance rates to rise in consequence, with Swiss Re seeing rates rising by up to 50 percent in disaster-hit areas. Several hedge fund goliaths are betting on a significant recovery for reinsurance stocks including Marshall Wace, Marathon Asset Management and Balyasny Asset Management. (Agecroft and Reuters)
Managers will continue to investigate and implement a plethora of new technologies to add value and enhance hedge fund investment processes and decision making. This includes technologies such as quantitative analytics, alternative data sources, machine learning and artificial intelligence. Information and technology will be increasingly used to increase efficiency and accuracy in sourcing information, researching ideas and executing investments. (Digiterre and Agecroft)
Coupled with the growth in use of more sophisticated technologies by hedge funds in the never ending drive for better quality, will be the outsourcing of several parts of their business infrastructure. This is also likely to include parts of hedge fund research and investment related activities. These may include IT, legal, compliance, 3rd party marketing, back office, data providers and analytics. In parallel with these outsourcing shifts, firms will place even more focus on cyber security and disaster recovery policies and procedures. (Agecroft)
Several specialist law and marketing firms have developed products that can identify and simplify the requirements of marketing investment funds in over 100 countries around the world. Many of these countries have low barriers to entry or benefits that are high enough to justify various reasonable requirements specified and identified by these products. A significant number of investors in these jurisdictions will be looking for high quality hedge fund managers but to date, have been underserved. These products can finally provide a breakthrough to marketing in these jurisdictions. (Agecroft)
The squeeze from both the expense and revenue sides of hedge fund businesses, especially for the majority with less than $100m in assets, will lead to some closures where funds are underperforming. The struggle will continue for many smaller hedge funds too, who lack the brand and distribution of larger funds. In fact some see this ‘culling’ of the industry as overdue: ‘the hedge fund industry remains over saturated with an estimated 15,000 funds we believe approximately 90% of hedge funds do not justify their fees, as evidenced by the mediocre returns shown by hedge fund indices’ (Agecroft)
Less traditional fee structures are likely to become a regular part of new fund allocations. With hurdles (before any performance fees are charged) for any investors who have the leverage to negotiate. We agree that the investor community is correct in demanding that alpha alone should merit performance fees.
Finally, as ever, downward fee pressure will continue on hedge funds struggling with underperformance; this will be coupled by growing competition from alternative, similar investment management products which also have lower fees. These will include smart beta products, alternative uses products and rich premium products. (Bloomberg news)
By: Stephen Masters
Get the latest news and stay up to date