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发帖数: 3577 | 1 Important Hedge Fund Trends For 2016 And Beyond
1. 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.
2. 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.
3. 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.
4. 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 managers have
a distinct advantage. Since 2009 there has been a high concentration of
hedge fund investment flows to the largest managers 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 security selection. Additionally, large fund
managers are often stewards of capital for many large pension clients and
thought of as ‘safe hands’ by risk adverse investment committees. They
have an incentive to reduce risk in their portfolio in order to maintain
assets and thereby increase the probability of continuing to collect large
management fees.
5. Pension funds reducing the average size of managers to whom they
allocate.
As pensions struggle to enhance returns to meet their actuarial assumptions,
we will also see an increase in the speed of the evolution of pension funds
’ hedge fund investment process. Historically, many pension plans started
with an investment in hedge fund of funds, followed by hiring a hedge fund
consultant and investing directly in, typically, the largest hedge funds
with the strongest brands. As they increased their knowledge of the hedge
fund industry and added to their internal research teams, they began making
more independent decisions and focused on “alpha generators” which
included mid-sized managers. Finally, they evolved into the “endowment fund
model” or best-of-breed strategy of investing. In the final stage, hedge
funds are no longer considered a separate asset class, but are incorporated
throughout the pension fund’s portfolio. Five years ago a hedge fund
typically needed multiple billion in AUM to be considered by pension funds,
while today we estimate this has declined to $750 million and expected to go
lower over time. This will have a very positive impact on the hedge fund
industry.
6. High quality marketing is essential for asset growth.
The hedge fund industry is highly competitive with our estimate of over 15,
000 hedge funds in the market place. In 2016, we will have continued
concentration of hedge fund flows into a small percentage of managers. We
expect 5% of funds to attract 80% to 90% of net assets within the industry.
In order to succeed it is not enough to have a high quality product offering
with a strong track record. Performance ranking among the top 10% of hedge
funds puts a manager in an exclusive group of 1,500 funds. Hedge funds with
high quality product offerings must also have a best-in-breed sales and
marketing strategy that deeply penetrates the market and builds a high
quality brand. This requires a team of well-seasoned professionals that will
project a positive image of the firm. This can be achieved by either
building out an internal sales team, leveraging a leading third party
marketing firm, or a combination of both. Firms that do not have a high
quality sales and marketing strategy will have a difficult time raising
assets.
7. Increased Hedge Fund Marketing Activity outside the US.
Marketing activity outside of the US has declined significantly over the
past few years due to AIFMD requirements becoming effective within the Euro-
zone. This has increased the focus on marketing to US investors by a growing
number of US domiciled hedge funds (with a majority of hedge funds already
located in the US) which has caused the US market place to become
increasingly more competitive. Additionally, many non-US firms aggressively
target the US market. We believe this trend will reverse as managers begin
to realize that hedge fund investors outside the US are significantly less
covered and the fact that the registration burden of selling in many non-U.S
. countries is less complex than perceived. In addition, a large segment of
European based investors tend to be more willing to invest in smaller
managers due to their higher return potential.
8. Continued pressure on fees.
The hedge fund industry is seeing pressure on hedge fund fees from many
fronts. Large institutional investors are successfully negotiating large
fee reductions from standard fees for large mandates and this pressure is
expected to increase as large institutions represent a larger percentage of
the market. Small hedge funds (generally those under one hundred million in
aum) more frequently have to offer a founders’ share class with a 25% to 50
% discount to standard hedge fund fees as an incentive to invest in their
fund. This ‘small fund’ threshold is trending toward $200 million. While
profit margins on UCITS structures are already below those for traditional
hedge funds, fee pressure is also intense in other fund structures including
managed accounts and 40 Act funds.
9. More Hedge Funds Shutting Down. Hedge funds will shut down at an
increased pace driven by four factors: 1) the current number of hedge funds
is near an all-time high of 15,000. Given a consistent rate for hedge funds
ceasing operations, hedge fund closures should also be at an all-time high.
2) This increase in the number of hedge fund managers has reduced the
average quality of hedge funds in the industry. Many of the lower quality
managers will experience a higher rate of closing down, which is good for
the industry. 3) Increased volatility in the capital markets increases the
divergence in overall return between good and bad managers. This in turn
increases the turnover of managers, as bad managers get fired and money is
reallocated to those who outperform. 4) The competitive landscape for small
and mid-size managers is becoming increasingly difficult. They are being
squeezed from both the expense and revenue side of their businesses. As
discussed earlier in this article, having a superior quality product alone
is not enough to generate inflows of capital. As a result, we expect the
closure rate to rise for small and mid-sized hedge funds.
10. Blurring of the lines between hedge funds and private equity funds.
Back in 2008, the main difference between hedge funds and private equity
funds was the structure of the fund and often not the liquidity of the
underlying investments. This was especially the case with illiquid fixed
income instruments where many hedge funds that focused on these strategies
offered monthly liquidity. This created significant liquidity mismatches for
many hedge funds which caused them to impose gates, suspend redemptions, or
liquidate their fund. Today many sophisticated investors understand the
benefits of illiquid investments, but are demanding fund liquidity
provisions that match the underlying liquidity of the portfolio. We will see
longer lock-ups, longer redemption notice periods, gates and private equity
structures for illiquid strategies.
http://www.valuewalk.com/2016/01/hedge-fund-industry-2016/?all= |
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