Opinion on Hedge Funds Trends in 2019
11 years after the last stock market crash, the alternative sector is subject to high pressure from investors due to Hedge funds relative drop in performance.
End of the Golden Age of Hedge Funds
Between 2000 and 2007, Hedge funds took 2% of the value of assets, and 20% of the profits generated, and some up to 30% or even 50%.
Today, the balance of power has reversed and customers can more easily dictate their terms. The level of performance-based fees is around 17%, and management fees are 1.5% according to “Hedge Fund Research”.
For two-thirds of institutional investors, hedge funds will have to continue the efforts they have been making for the past two years and further reduce their remuneration levels this year. Too many funds have charged commissions with no real coherence to their added value.
Barriers to entry
Since the crisis of 2008, we have seen a transfer of power from “funds of funds” (funds that manage a portfolio of hedge funds) to consultants. Many “funds of funds” have disappeared since the crisis or have merged. Blackstone, one of the largest, is known to be very aggressive given its size ($75 billion). He can withdraw his money from a fund as quickly as he has entrusted it, depending on his market views.
In this highly competitive environment, new small funds without a renowned benchmark manager find it very difficult to raise capital unless they are on a very original strategy. The number of new fund launches in the second quarter, 148, was at its lowest level since the first quarter of 2009, according to Hedge Fund Research.
The major emblematic alternative strategies have not helped to restore the reputation of hedge funds. Activism is much more difficult today than in the 1990s and 2000s because listed companies are quite well managed and activists have smaller margins to create value. Most of them do not generate significant risk-adjusted returns over long periods of time and their commissions are too high.
Family investment companies, “family offices”, tend to pick their investment ideas from activists, which trivializes the strategy and reduces its interest.
Returns on global macro funds have been disappointing since the crisis. Some funds have made money in some markets but lost money in others. Market trends have become less pronounced and subject to constant reversals. This complicates the task of Commodity Trading Advisors (CTAs) funds, which are trying to surf on these movements.
1 out of 10 institutional investors has already invested in hedge funds positioned on alternative risk premiums (momentum, return to the average, discounted stocks, etc.) or artificial intelligence (autonomous quantitative management)
7% of institutional investors have invested in hedge funds specialized in cryptographic currencies and an additional 6% were planning to do so this year.
Half of those who have already invested in it are considering increasing their investments.
I expect the hedge fund sector to grow by 31% over the next five years to reach USD 4,700 billion in 2023. Even if it is the percentage, it is the smallest anticipated increase of all alternative asset classes. At $1.1 trillion, it follow the second highest level of expected net capital growth, behind private equity alone ($1,800 billion), which should outperform hedge funds as the largest alternative sector, at $4,900 billion.read more
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