Global Alternatives Survey 2016 via Willis Towers Watson
602 entries are included in the survey. The majority of the data (556 entries) comes directly from investment managers with the remainder coming from publicly available sources. This includes the Global Billion Dollar Club list, published by HedgeFund Intelligence.
Is It A Good Time to Be a Stock Picker? Interview With Worm Capital
ValueWalk's Raul Panganiban interviews Eric Markowitz, Director of Research, and Dan Crowley, Director of Portfolio Management, at Worm Capital. In today’s episode they discuss their approach at Worm Capital and where they find opportunities. Q4 2020 hedge fund letters, conferences and more Interview with Worm Capital's Eric Markowitz and Dan Crowley
Section 1 – Asset Class Trends
Hedge Funds – Key Trends
The evolving HF landscape
Recent returns have been disappointing leading to some redemption pressure, but overall we believe this is healthy for the industry. The focus by investors on diversity and value for the money will continue to dominate, and facilitating this effort is the recognition that “hedge funds” are not an asset class. There are diversifying return drivers that are best sourced outside of the traditional hedge fund structure and for fees that are much less – commonly referred to as alternative beta strategies and include strategies such as reinsurance, carry, value, and merger arbitrage.
However, given the rapid growth in this emerging space, there is some risk of crowding, and investors who don’t fully understand the risks of investing here should work with an advisor or outsource. This is especially important among the quantitative and factor-based strategies, many of which carry left tail risks and are managed using an antiquated or less differentiated approach.
Further, while they are called alternative “beta” strategies, there usually is some element of manager skill necessary despite the mechanical approach to implementation – for instance in screening, sourcing, modelling, risk management and execution. In terms of alpha seeking managers – that bar is high but there are definitely good opportunities for skillful managers; managers must be able to prove they can add both diversity and incremental returns. Importantly, investors and consultants need to recognize the importance of alpha diversity when building portfolios now more than ever; if not done correctly they can indirectly be making outsized “bets” on factors such as style, sector, capitalization – which for instance hurt a number of investors and equity long/short managers in 1Q
While there have been performance headwinds for hedge funds, the need for diversity away from traditional equities is the strongest it has been in several years in our opinion. Hedge funds and alternative beta strategies, which can be broadly categorized as liquid alternatives, are uniquely equipped to deliver returns while helping investors mitigate downside risks.
While we anticipate that some capital will be withdrawn from the industry, especially the hedge fund of funds industry given the high fees traditionally charged by these organizations, overall we continue to see value to be had if done correctly, and we are advising our clients to increase their allocations generally. Industry wide, we anticipate continued growth in alternative beta strategies and assets, perhaps offsetting any redemptions fromalpha seeking managers who have struggled to perform.
Private Equity – Key Trends
The evolving private equity landscape
Fundraising in private equity is buoyant off the heels of three years of very strong distributions and with investors looking for alpha after other asset classes of late have not delivered on generating excess returns. The market had been somewhat bifurcated with those managers boasting exceptional short- and long-term track records raising capital particularly quickly while others took longer to secure capital. However, this trend has been less prevalent recently with the fund-raising tailwind meaning most institutional quality managers have been able to raise capital, especially in the larger end of the market.
With all this influx of capital and cheap financing with little to no covenants, pricing both in the US and Europe are at or near all-time highs though deal flow for both markets have cooled given the pricing. Meticulous selectivity with managers who have proven discipline in prior cycles and have a range of skills to bring to bear on their portfolio companies will become critical in the next phase of the cycle.
The secondary market continues to mature and grow in prominence, increasing the liquidity of the asset class though pricing has come down a bit since the highs of last year. This has been due more towards public market sentiment rather than a drastic change in supply and demand.
Last year we noted that the pressure on fees will be volatile and tends to be inversely correlated with positive market sentiment and indeed that has been the case with some managers getting terms that were very manager friendly. However, we expect continued downward pressure on fees over the long term. Part of that pressure will be from the on-going dis-intermediation story in private equity with large asset owners doing deals themselves or at the very least investing in fund directly without the need of a fund of funds. For fund of fund managers, they have been moving more towards separate accounts and away from-commingled funds.
Going forward, we would expect to see more development in customized portfolios for investors, especially from the larger managers who have created asset management business instead of pure play private equity ones. For private equity managers in the small and mid-market space, we expect more of the same with those managers providing exposure through commingled funds with some coinvestment opportunities.
Real Estate – Key Trends
The evolving real estate landscape
Real estate markets have continued to perform strongly driven by investors’ desire for attractive yields in a low (or in some cases negative) bond yield environment and, in many markets, healthy rental growth. In many ways it feels like 2007. Double digit returns, transaction volumes at multi-year highs, yields reaching multi-year lows, debt costs at ever lower levels on higher loan-to-value terms, regional (nongateway) locations seeing increased investor interest, speculative development starting to re-emerge and fund raising breaking records in terms of speed and size. We have also seen a growing trend of private real estate funds acquiring listed property companies, a trend which we last saw emerge at the previous peak in markets. This being said, unlike 2007, the property yield spread relative to long term government bonds shows a healthy spread, which provides some investor comfort. Further, much of continental Europe hasn’t seen as much of the rally in recent years and appears some way from peak cycle behaviours.
Listed property companies in aggregate are trading at higher relative valuations to long run averages. However, there are some notable exceptions such as the UK, where the listed market appears to be more pessimistic relative to the unlisted market around Brexit fears, and the Hong Kong market where stock market pricing appears to be taking a more negative view of a Chinese slowdown compared to unlisted markets.
Long lease property strategies in Europe have continued to see interest from de-risking pension funds given the expected return differential relative to bonds. In many regions around the world we are seeing growing interest in alternative property sectors such as healthcare, storage, student assets or the Private Rented Sector (PRS) in the UK. Strategically, the addition of these alternative sectors generally helps diversify against the cyclicality of offices which can often be a disproportional contributor to risk in portfolios.
Despite real estate in many regions looking attractive relative to bonds, we believe investors should be more patient and selective when investing new real estate allocations at the current time. We believe US and UK markets are at higher points in their real estate cycles, meaning one needs to be increasingly cautious of higher risk property strategies, particularly those using high levels of debt. The Continental European market appears further away from peak cycle. Despite its economic issues, with low (or negative) interest rates property looks reasonably supported as long as prolonged deflation can be avoided. Emerging market property markets have been weak and although near term catalysts remain uncertain, there could be attractive entry points for long term investments in certain sectors. We believe future demand for long lease property strategy is likely to persist as long as bond yields remain low. The ability to source attractive assets however is becoming more difficult and so subscription queues for such strategies may well increase.
We expect greater defensiveness from certain property sectors more aligned with thematic tailwinds such as like student assets (growing emerging market wealth), property healthcare (demographics), logistics (e-commerce) and residential/storage (urbanization).
Infrastructure – Key Trends
The evolving infrastructure landscape
Deployment by institutional investors into the infrastructure asset class has increased again. As can be seen elsewhere in the investment universe, there is a trend for the more successful funds to increase in size, sometimes quite substantially. On the other hand, a significant number of funds who were among the early closed-ended fund offerings are reaching the end of their lives and are finding that the future looks uncertain. This is driving activity around extensions, stapled offerings, etc.
As the industry has matured, better discipline can be seen by the manager universe regarding deal selection and pricing as well as asset management. It is in the area of fund size and terms where there is a lot more work to be done although progress here can also be identified. The trend of large institutional investors seeking to access deals directly continues in the infrastructure space which makes sense given the size of assets which are available in this asset class. We are also seeing governments becoming more vocal and active in attempting to encourage institutional investors to invest in infrastructure in their jurisdictions.
The increased institutional investor interest in infrastructure investments has both cyclical and structural aspects. Cyclically investors are facing an uncertain economic outlook and are seeking opportunities to diversify risks and return drivers. Structurally almost all institutions are either not yet invested in infrastructure or are below their target allocation. Despite the headlines which suggest that investor demand is outpacing supply and therefore driving up asset prices, the reality is that the requirement for private investment in infrastructure is immense in all geographic regions.
We will continue to see managers develop in order to capture these opportunities through more engagement with stakeholders (governments, regulators, communities), possibly more specialisation and definitely a higher appreciation of the asset management skills required to manage the risks inherent in an infrastructure portfolio. We will also continue to see the range of implementation options for investors increase beyond the traditional private equity-like pooled fund model and the in-house direct investment model.
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