Put Into Perspective: Outlook For Hedge Funds ‘More Positive’ In 2016 by Skenderbeg Alternative Investments
“Better to preserve capital on the downside rather than outperform on the upside.” – William J. Lippman
Outlook for hedge funds ‘more positive’ in 2016
eVestment report expects industry growth to match or exceed 2015
The hedge fund industry is in a good position for growth in 2016 and is set to outpace last year despite recent negativity. Estimated net asset inflows of $50-60bn in 2015 are anticipated to be either matched or improved upon, eVestment’s 2016 Hedge Fund Industry Out-look report suggests.
eVestment identifies increased interest in multi-strategy, macro and managed futures products and dampened interest in credit and event-driven funds as key factors in their assessment of the industry’s prospects. Multi-strategy fund inflows are expected to continue this year due to their diversity and return potential as demonstrated in 2015, in addition to an expected shift by investors towards alternatives in the year ahead, with the data provider tip-ping the strategy to attract up to $35bn.
Despite mixed macro fund performance in H2 of 2015, growth in this space is expected to be driven by an increase in demand for hedge fund products from institutional investors. Demand from institutional allocators is predicted to hold steady unless a major market event were to take place, when only the most defensive asset classes would gain new assets. However, increased institutional investment in the hedge fund space is expected to be less than that in the private equity or infrastructure space.
The eVestment report said this trend indicates “the institutional community continues to be willing to sacrifice liquidity for less-correlated sources that will help to meet target returns”.
Hedge fund workers without MBAs make bigger bonuses: SumZero
A post-graduate degree may not be the smartest investment for a young pro-fessional going into the hedge fund industry.
Hedge fund associates with undergraduate degrees bring home bigger paychecks than their peers with advanced business degrees, according to a survey conducted by SumZero, an online community of fund professionals.
Click here for the full compensation report.
So-called pre-MBA associates took home an average of $200,000, including a $90,000 bonus, according to SumZero’s 2016 Fund Compensation Report, which is based on a survey of more than 1,800 associate positions between 2012 and 2015. Associates with an MBA, meanwhile, took home an average of about $184,000, including a bonus of $60,000.
SumZero struggled to explain the results.
“It is unexpected to see the pre-MBA associates out-earning their peers,” said Nicholas Kapur, chief operating officer at SumZero. “There is a chance that those without MBAs have a greater incentive to perform because their roles are generally not permanent … Our best guess is that the pre-MBA pool might just be a bit more competitive.”
Hedge fund industry assets increase in difficult year, managers upbeat for 2016
Despite a challenging year, hedge fund industry assets under management increased by approximately $180 billion during 2015 and now stand at approximately $3.2 trillion, according to industry data provider Preqin. The findings were part of Preqin’s annual Global Hedge Fund Report, which was released this week at MFA’s 2016 Network conference in Miami.
According to the report, investors committed nearly $72 billion of new capital to the industry and Preqin’s benchmark reported 2.02 percent gains during the year. Even though performance was down from previous years, 37 percent of surveyed fund managers reported an increase in institutional capital.
Time for worried investors to start betting on hedge funds?
Money spent on the high fees that come with investing in hedge funds might seem to have been a waste over the last six years, considering the performance of traditional assets. But with the bull market in stocks now very long in the tooth and interest rates at historic lows, hedge funds are looking like an attractive alternative to investors worried about their portfolios.
“This market has been driven by the Fed since 2009, and the easy money has been made,” said Charles Gradante, managing principal of the Hennessee Group, an investment consultant focused on hedge fund research and manager selection. “Most people want to stay in equities, but they also want a more hedged investment management style.”
Hedge funds – Top 10 trends for 2016
- Reduction of expected returns for a diversified hedge fund portfolio. Hedge fund performance is driven by a combination of alpha (manager skill) and beta (market driven return). From 2009 to the beginning of last year, as both the fixed income and equity markets experienced strong bull markets, beta had been a tail wind for hedge fund performance that rewarded managers with net long market exposure. Over this time period, investors’ return expectations for new managers steadily declined from mid-teens back in 2009, to above 10% in 2014 and to mid-to-high single digits today. This reduction in expected returns stems mostly from the belief from many investors that beta will add very little value over the next few years due to the capital markets trading near all-time highs. This reduction of return expectations will have a broad impact throughout the hedge fund industry.
- Greater demand for hedge fund strategies with low correlations to long only benchmarks. Lower return expectations for hedge funds will dramatically change the relative demand for hedge fund strategies. Higher beta strategies will be perceived as higher (and unnecessary) risk. Some of the strategies that will see a significant increase in demand include: relative value fixed income, market neutral long/short equity, CTAs, direct lending, volatility arbitrage, reinsurance and global macro. These strategies will see an increase in demand due to their perceived ability to generate alpha regardless of market direction and as a hedge against a potential market sell-off.
- Hedge fund industry assets to reach all time high in 2016. Despite all the negative stories about the industry, including some recent high profile fund closures, total hedge fund industry assets will reach a new all-time high in 2016. This will be fueled by investors led by pension funds reallocating assets out of long only fixed income to enhance forward looking return assumptions and other investors shifting some assets away from long-only equities to hedge against a potential market sell-off. We expect hedge fund industry assets to rise by $210 billion, or 7%, which was derived from a forecast of a 2% increase due to net positive asset flows and a 5% increase from performance.
- Smaller managers will outperform. While many studies have shown stronger performance by younger and smaller funds, the 2016 landscape should provide a particularly attractive environment for smaller hedge funds. In moving to a performance environment increasingly dependent on alpha, security selection becomes even more important, especially in less efficient markets where smaller man-agers have a distinct advantage. Since 2009 there has been a high concentration of hedge fund investment flows to the largest manag-ers with the strongest brands. This has caused many of these managers’ assets to swell well past the optimal asset level to maximize returns for their investors. As they become larger, it is increasingly difficult for large, multi-billion dollar funds to add value through se-curity selection. Additionally, large fund managers are often stewards of capital for many large pension clients and thought of as ‘safe hands’ by risk