AIMA Dispatches 14: Mid-Year Musings
By Jack Inglis, CEO AIMA
Published: 13 July 2021
By the halfway point of the year, hedge fund investors ought to be feeling happy with their returns. Average performance was around 10% for the first six months of 2021 making it the best first half so far this century (or millennium for that matter). Of course, as the disclaimer says, ‘past performance does not guarantee future results’, but we do see a clear sense of optimism that good things are going to continue.
AIMA’s latest Hedge Fund Confidence Index (in partnership with Simmons & Simmons and Seward & Kissel) showed an uptick in Q2 from an already buoyant sentiment reported in Q1. Separately, our recent bi-annual report on investor intentions, in partnership with HFM, showed that 80% of allocators were indeed satisfied with their hedge fund portfolios in H1 and around a third of them intend to increase their investments yet further. Net inflows so far this year exceed US$60 billion, and the total size of the hedge fund industry is now well over US$4 trillion.
However, many investors are telling us that they are now reaching their long-term target allocations to hedge funds. US endowments for example have 20% of their portfolios in hedge funds compared to 14% in private equity. There is no doubt that private assets have been in the limelight for increased attention from investors in recent years and that seems to be ongoing. Our work through our Alternative Credit Council is seeing strong growth in demand for private credit funds as an antidote to low fixed income yields in the public markets. Previous dyed-in-the-wool hedge fund managers recognise the opportunity and are broadening their reach into private markets, thereby removing the fixed lines within alternative investments. Is this a style drift to be concerned about? No, the research, rigour, and risk management for successful investing cuts across both public and private markets, so long as they are structured in the right way.
None of this means the pure hedge fund industry cannot continue to grow its investor base. Private wealth remains underinvested, and managers are telling us that their top target client base is now family offices and high-net-worth channels, where the weighting to hedge funds is well below what we see from pension funds.
Those who knew me in my trading days will attest that I’m not much of a market predictor nor economic forecaster, so I won’t try here other than to say that long-only portfolios in public bonds and equities will not meet required investor return targets over the next several years. Inflation is clearly the topic on most minds, although the jury is out as to whether it will be transitory or long term. In either case, the rationale for hedge funds seems more compelling than ever. Traditional fixed income investments need a substitute and hedge funds offer just that. Global macro strategies are cited by investors as a good inflation hedge and are seeing good demand for that reason. Other popular strategies are event-driven for the high level of corporate activity, equity long/short for rotational shifts within markets and multi-strategy for a bit of everything.
Despite all the above, managing an alternative investment management firm does not get any easier. Regulatory compliance is an ongoing challenge, and the agenda ahead needs to be closely focused on. With the new SEC Chair now in situ, the grass is unlikely to grow under Mr Gensler’s feet. Top of his list are greater disclosure and transparency around ESG, market structure reforms in the wake of GameStop et al, regulation of digital assets and technology, investor protection in SPACs and enhanced private equity disclosures. Meanwhile, in the EU, the reworking of the AIFMD is well underway with the changes being expected before year-end and the future of delegation as we know it causing not inconsiderable concern. The UK has signalled the end of its full equivalence ambition so we will see rules diverging there over time to add to managers worksheets in what is an already fragmented global regulatory landscape. AIMA is fully focused on all these areas and will provide guidance for members along the way.
Fortunately, regulators have not piled a heap of new consultation papers on us to complete during the summer months so there is hope for us all to get a break before September. Where we might be allowed to travel to is another matter but surely it is only a few months before we are regularly meeting up again in person. What a novelty that will be!Lastly, as a member organisation, AIMA is dependent on you telling us what you think of us. It is a long time since we did a member-wide survey, and our governing body has recommended we seek your feedback. We will be launching a simple survey before the end of this month which will only take a couple of minutes to complete. Please do respond to it; in doing so we will be better placed to serve your needs.