Fund managers seem broadly optimistic about a Trump presidency’’ impact on the alternative assets industry, but some concerns remain
Q3 2016 hedge fund letters
Following Donald Trump’s victory in the 2016 US presidential election, Preqin interviewed 182 alternative assets fund managers* in order to gauge their perceptions on the likely impact of the result on their own portfolios, and their prospects for the next four years. The results of the survey indicate that, despite some expressing concerns about a Trump presidency before the vote, fund managers feel that this outcome will have an overall positive effect for themselves and for the industry as a whole. Below are some of the key findings:
Alternative Assets – Key US Election Survey Findings:
- Over half (53%) of fund managers think that the effect of the election will be positive for alternative assets in the US, while just 12% think it will be negative. By contrast, 25% of fund managers think that the industry outside America will be negatively affected, with 22% expecting a beneficial effect.
- The policy pledges that fund managers think will be most beneficial are the reduction in corporate tax (which 73% of manager think will be positive) and proposed infrastructure spending (cited as positive by 62% of managers). However, the majority of surveyed managers believe that withdrawing from trade deals will be negative, while 55% believe that changes to the taxation of carried interest will adversely affect them.
- Thirty percent of private capital managers expect the short-term effect to be positive for their US-based holdings, but 21% believe it will be negative for their other assets. In the longer term, the perceived positive effect on US investments persists, with 28% foreseeing a positive effect, while the outlook for other assets is broadly neutral.
- Hedge fund managers are optimistic: 46% expect their US-based assets to benefit in the next 12 months, and 35% expect the effect to last into the longer term. Similarly, 28% expect a boost for their non-US-based holdings in the next 12 months, and 27% over the longer term. As a result, 53% of hedge fund managers expect their performance to benefit in the remainder of 2016, 46% over the next 12 months, and 35% in the longer term, with only around a tenth of managers expecting performance to suffer at any stage.
- For the most part, managers cited uncertainty over the effects of Trump’s policy proposals as a key consideration. However, while some managers suggested that potential impacts on debt rates and securing investor capital might be negative, others felt that market volatility might serve to benefit alternative investments, and reduce recent correlation in returns between the industry and more conventional financial markets.
Alternative Assets in Trump’s USA: Fund Managers Respond to Election Result
On November 8th, all eyes across the globe were focused on the US as America went to the polls to choose their next government. The result of Donald Trump to become 45th president has left many pondering the consequences, and resulting outlook for the States.
With this in mind, in the days after the election Preqin surveyed 125 fund managers active across private equity, private real estate, infrastructure, private debt and natural resources (collectively here referred to as “private capital”) and 60 hedge fund managers to assess the impact of Donald Trump’s presidency on this important and growing part of the global financial landscape.
Of the economic policies that were discussed by the Trump camp, the majority of alternative managers generally believe that the lower corporate tax rates (75%), further US infrastructure spending (62%) and incentivized repatriation of corporate earnings held abroad (57%) will benefit the alternatives industry.
The majority believe his plans to renegotiate or withdraw from trade agreements and plans to tax carry as income will negatively impact the industry, despite the proposed reductions in the top-rate of income tax. Managers cited uncertainty over the effects of Trump’s policy proposals as a key consideration.
The result of these mainly pro-business policies has been that the majority of respondents believe their respective industries in the US – and the alternative assets industry more generally – will be positively affected by the Trump administration.
Managers are less convinced of the benefits to the industry outside the US. Both camps believe the result will have less of an effect on the US and more closed-end managers believe there will be negative impact on their industry outside the US than hedge fund managers (27% vs. 18%). However, while some managers suggested that potential impacts on debt rates and securing investor capital might be negative, others felt that market volatility might serve to benefit alternative investments, and reduce recent correlation in returns between the industry and more conventional financial markets.
Alternative investment managers believe that they are unlikely to secure more capital from investors outside the US as a result of the election, although the greatest proportions across both private capital and hedge funds believe the result will have no effect on their fundraising from US- and non-US-based investors.
However, one firm surveyed stated: “China-based investors could be reticent [to invest]” while another said: “political uncertainty will lead to foreign investors staying away from the US”.
Around a quarter of private capital firms believe they will secure less capital from investors, double the proportion of hedge fund managers.
The vast majority of alternative investment managers believe that their fundraising activity will not be affected over Trump’s presidential term, most likely due to hedge funds’ ability to capture returns in varying market conditions and the closed-end model’s inherent illiquidity.
An area where the largest proportion of managers believe there could be an effect is in the location (18%) and types (13%) of investors that are targeted, while the industry focus could be a factor due to uncertainty over specific policy decisions.
A greater proportion of private capital firms believe that their investments in the US will be positively affected by Trump’s win over both the next 12 months (30%) and the longer term (28%) than negatively affected.
Unsurprisingly, for non-US based investments already in portfolios, the largest proportions of managers believe there will be no effect. For those that do believe there will be an impact in the short term, almost double the proportion of firms believe there will be a negative impact (21%) than positive (11%), while equal proportions (14%) believe they will see some kind of effect in the long term.
Unsurprisingly, due to hedge funds typically holding underlying investments in more liquid assets, the effect of Trump’s win on existing investments has generated a greater consensus from surveyed hedge fund managers. Across all geographies and timeframes, more hedge fund managers stated that their existing investments will be positively affected by the election result than negatively, although large proportions predict no discernible change.
The need for investors to cushion returns in volatile public markets should help the industry, particularly within the US, where uncertainty about changes to economic policy and the business environment could lead investors toward hedging strategies.
The majority (53%) of hedge fund managers surveyed believe that the US election result will have a positive effect on their own funds over the rest of 2016. Over the next 12 months, a similar level (46%) predict their performance will be positively affected by the ensuing market conditions post-election.
Over the longer term, as the effects of the election become clearer and its impact on markets stabilizes, the proportion of fund managers believing that it will have no impact on performance grows. However, over all time frames, only one in 10 respondents predict there will be poorer performance within the industry. This positivity stems from the characteristics of the industry, with one manager stating: “Greater uncertainty, volatility and negativity should help the industry, as it should outperform long-only strategies in such conditions”.
Article by Preqin