United States: Hedge Fund Market Outlook

Last Updated: July 11 2019
Article by Benjamin Tenenbaum

Has the demise of the hedge fund industry been greatly exaggerated? At EisnerAmper's Alternative Investment Summit, fittingly held at the Museum of Modern Art, a panel of hedge fund experts including Simon Lorne of Millennium Management, Kirk Wickman of Angelo Gordon, and Michelle McCloskey of Man Group discussed how the art of asset management in the hedge fund industry is evolving to meet the changing demands of modern investors in an increasingly dynamic and complex macroeconomic environment.

While the industry experienced underperformance relative to major benchmarks during 2018, particularly during Q4, hedge funds bounced back strongly through the first two quarters of 2019. While it turns out the long bull market isn't quite over yet, the selling pressure towards the end of 2018 led to an increasingly sophisticated and institutional investor base seeking downside protection while maintaining capital deployed in global markets. This has positioned the hedge fund industry with tremendous opportunity, particularly for asset managers able to identify and seize upon the growing trends of investor preferences towards fee flexibility; portfolio customization; and environmental, social, and governance (ESG) considerations, while navigating increasing political and macroeconomic uncertainty.

Flexibility is the new standard

Gone are the days of standardized portfolio products reminiscent of the recurring classical antiquity portrayed by the Renaissance greats. In 2019, everyone wants their own palette. Co-mingled funds are becoming exceedingly rare at all but the largest of funds, as managed accounts tailored to individual investor preferences are becoming the industry standard. Managers are increasingly employing customizable products, program pricing and fiduciary oversight to help grow assets under management, with rising levels of transparency into investment strategies and asset allocation decisions. While the operational complexity of running separate accounts comes at a cost, the message to investment managers is clear: If you're not willing to be flexible, you're going to miss out on some real opportunities to raise capital.

Environmental, social, and governance – not just fluff

Once looked down upon by some within the industry as 'feel good fluff,' ESG considerations are rapidly becoming ubiquitous necessities within the industry, as fund managers chase not only capital from a more socially conscious investor base, but also greater returns. As a technological arms race continues to reshape the industry, asset managers continue to innovate to find ways to quantify and embed ESG considerations, such as climate change characteristics and consumer behaviors, into their research process to analyze risk factors and optimize alpha. Although there is often lack of consensus in regard to social and environmental impact (for example France has deemed nuclear to be good due to sustainability while Germany has determined it to be bad due to catastrophic outcomes in the event of failure), investors are increasingly interested in managers that at the very least build ESG considerations into their models.

Political volatility

Behind the brush strokes of innovative asset managers on their canvas of committed capital lies an increasingly unpredictable easel of political volatility. With growing uncertainty surrounding both Brexit and Asian markets, the political is undoubtedly impacting the financial. In order to mitigate geopolitical volatility, managers are emphasizing greater diversity in their investor base to hedge against rapid capital outflows. In addition to global factors, asset managers are closely following the statements of Fed Chairman Jerome Powell as the Fed weighs whether to cut interest rates for the first time in over a decade amid uncertainty over trade and global growth. Further, the industry is closely monitoring a regulatory environment that over the past decade has piled on expensive barriers to entry, resulting in upstart portfolio managers with innovative strategies being priced out of capital raise opportunities due to lack of resources to build out large compliance teams. Noted one of the panelists, "It's great for us, but I don't think it's good for America."

Looking forward

Despite recent negative media headlines touting passive investment over active management, hedge funds remain uniquely well positioned moving forward. One panelist noted, "many investors in today's markets have never experienced anything but a relatively benign upwards moving market in a low rate environment, so passive looks easy now, but there will be a reckoning when it no longer looks easy." For hedge fund managers, the art of asset management remains about meeting the demands of modern investors while navigating downside risk. Today's dynamic political and macroeconomic environment presents the opportunity to do exactly that.

To check out our blog series from each panel from the EisnerAmper 4th Annual Alternative Investment Summit, please click below.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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