Dispatches 10: No Alternative to Alternatives

By Jack Inglis, CEO AIMA

Published: 29 July 2020

Now we are past the halfway stage of this extraordinary year, I thought I’d summarise the health of our industry and attendant investor sentiment.

In reading the results of several reports and surveys I find they chime with our own discussions with members and investors. Overall hedge funds are doing well, and investors are satisfied.  I’m reminded of that great album by Supertramp in my youth: “Crisis? What Crisis?”.

The MSCI World index lost close to 6% in H1 2020 and as I write, most stock markets around the world are still in negative territory with many European indices still showing losses of 15%-30% for the year. The great bonanza of super equity returns from a 10-year bull market is now a distant memory and in this altered investment landscape hedge funds are being singled out in preference to long only funds, whether equities or bonds. Recent investor surveys see a marked pickup in investor interest and manager searches.

Hedge fund redemptions were experienced in the earlier part of the year and cash was parked on the side-lines, but this has now slowed with the SS&C forward redemption indicator now back in line with the historical average. Investors are declaring an intention to invest once again, with a survey by Credit Suisse revealing hedge funds to be the top investment choice for asset allocators in the second half of this year. There are now 5x as many investors planning to increase their hedge fund exposures than those indicating a decrease. A similar study by Bloomberg found the same result, with hedge funds being first choice and private debt in second place. 60% of allocators surveyed said they had either made new allocations to hedge funds or were planning to in H2. This is further compounded by research from JP Morgan which shows that the number of investors seeking to boost their hedge fund investments has more than doubled since January 2020, with US managers expected to be the main beneficiaries.

Q2 provided the best quarterly performance for hedge funds of the past 5 years. Close to half of all hedge funds are reporting positive performance for the year but as you would expect in such a varied industry, return dispersion is quite prominent. The average gain of funds who are in the black this year is 9%, while the average loss of those in the red is -11%. Two thirds of investors describe their hedge portfolios to have met or exceeded their expectations.

It is the opportunity set ahead that is of most interest to allocators, who feel that it will be long and bumpy road back to recovery for economies. They are repositioning their portfolios, and this will inevitably involve switching between strategies and funds, so not all managers will benefit. New allocations are most likely to go to existing relationships who can demonstrate a clear vision of lucrative investment themes and ideas, whatever the strategy, created by this environment of uncertainty, volatility and dislocation.

One thing is certain: institutional investors can no longer rely on the decade long rising tide of equity and bond markets. There is simply no alternative to alternatives.