CEO Blog: February 2018 Notes

By Jack Inglis, CEO, AIMA

Published: 16 February 2018

By now we have a pretty clear idea of how hedge funds performed in 2017. The numbers are in, the data collectors have crunched and the prime brokers have opined. I’ve settled on Preqin figures that show an annual return of 11.5% and net investor inflows of $50 billion. Preqin's report shows the total industry size to be over $3.5 trillion, a figure that recent research from Winton Capital concludes is a considerable overstatement of the real picture.   The reality is, as Winton points out, there are no clear lines as to what constitutes a “hedge fund”. For me, I tend to think of the industry in the broadest terms: alternative investment strategies in the public markets where “alternative” means not being bound by the constraints of traditional long-only investment mandates. The Preqin numbers seem about right in that context, and I shall be speaking on this and more at their seminar in London next week to launch their 2018 Global Alternatives Reports.

Within “alternatives” Preqin also produces a report on the private debt industry. This is something we at AIMA have a keen interest in through our affiliate entity the Alternative Credit Council. Here, too, the figures look good: $107bn was raised in new private debt funds over 2017 and rolling five-year IRR returns remained above 11%. Our own research predicts this sector to exceed $1 trillion by 2020, and we see clear evidence of investors planning to allocate more to these strategies.

But enough of last year. 2018 has already seen a 10% drop in the S&P 500 and a huge spike in the VIX. There will always be commentators keen to point the finger of blame at alternative funds for causing such moves and in particular those using algorithms in their investment process. Once again, the blame is misplaced. AQR’s Cliff Asness and other leading systematic managers have explained that such strategies are nowhere near the size to explain the volumes going through the markets during the selloff. Fearful human behaviour and the tendency for some traders to panic during downturns cannot be ignored. Fund managers' machines should not be held accountable for every major blip in the markets.

Of course, we are in the midst of a technology revolution, and it is hard to stray far from discussions as to how this is changing investment and operational processes. I participated in the Cayman Alternative Investment Summit earlier this month, and the theme over the two days was entirely given  over to the new digital world which we inhabit. Alongside an interview with 'Sophia', a social humanoid robot, we heard from enthusiasts about how Bitcoin will rise to $100,000 and how AI and Blockchain will impact everything we do. For further insights I’d point to the recent study from KPMG and Create, Alternative Investments 3.0: Digitize or Jeopardize. All are agreed that while it’s still early days, our industry will dramatically change because of these developments.

Does this herald us all being made redundant? Hopefully not. As was quoted in Cayman: Computers are incredibly fast, accurate and stupid. Humans are incredibly slow inaccurate and brilliant. Together they are powerful beyond imagination”. Maybe they will combine to lessen the sort of market gyrations we’ve just seen? Now that would give something for the commentators to talk about.