As April started to get underway, the markets tumbled, with the S&P 500 off 4%, the Russell 2000 declining 9%, and the Nasdaq 100 down 4% over the past month following a bit of a bump here later in April. A significant amount of uncertainty has crept into the markets, weighing on returns and causing concerns for some investors.
However, it's business as usual in the fund management industry, with one expert noting a lack of panic among fund managers. In a recent interview with Hedge Fund Alpha, Keith Sharkey, managing principal at Kaufman Rossin Alternative Investment Services, shared his views on the latest trends in the fund management industry.
Trends in the fund industry
A key trend he's been seeing is a reduction in the number of new equity hedge funds. Sharkey said in the late 1990s and 2000s, 90% to 95% of new funds were equity and fixed income funds. They spanned every strategy as managers sought special skills to attract investors and beat the market's returns.
Today, investors are trying to soften the fall in the modern fund world, so there is an even wider variety of funds. For example, firms like Vanguard, Fidelity, State Street and others offer low-cost equity funds and a variety of other kinds of funds so that investors can spread their money around into multiple funds, hitting every unique strategy.
"What's left for hedge fund managers today is finding other ways to split the traditional 80/20 or 60/40 portfolio," Sharkey explained. "Today many funds are private equity, venture capital, real estate or private credit, although there are some other esoteric, unique, outlier funds that you need an expert for and are willing to pay the fees for, whether a traditional management or performance fee to whoever is managing your money. Investors also are putting their money into strategies unique to fixed income or equity."
Greater diversification, including crypto
He added that fund managers are also willing to diversify their portfolio for accredited investors who want to dabble in real estate, real estate investment trusts, venture capital or even cryptocurrency. According to Sharkey, crypto funds are very popular, although Kaufman Rossin does not work with many.
"We tend to stay away from any potential risk and exposure to our firm and clients," he explained.
Sharkey recalled when the Argentine government created a cryptocurrency and Argentinians invested in it, driving up the price. Later it sold off, and the rank-and-file investors got left behind. Now lawsuits and accusations around the issue are swirling.
Impact on fund strategies
These shifts are sending shock waves throughout the fund industry. According to Sharkey, many people who've been in the business for a long time and large family offices or wealth advisory firms are pivoting to create alternative strategies. Additionally, many investment managers are leaving the larger shops to set up their own firms.
"They have clients who want to follow them, and they're recognizing that well-established firms and smaller one- or two-man operations cater to their different needs and wants," Sharkey explained. "... Investors come from everywhere to invest in these strategies. Foreign investors don't want to pay taxes in the U.S., so they create offshore feeder entities to be tax efficient, and there are costs associated with that."
Next, these new firms need professionals with expertise in their strategy and operational functions to help with accounting and services to investors, financial reporting, and more. According to Sharkey, many firms are looking for ways to outsource some of those operations so that they don't have to invest in people and the costs associated with all those functions.
The unknowns of the regulatory environment
Among the latest challenges facing fund managers today is a lack of clarity around the regulatory environment. Sharkey noted that with a new administration comes the potential for a new regulatory environment that we just don't know fully about yet.
"We don't know what it will be like tomorrow," he said. "We don't know what the IRS tax code will be like tomorrow. They're eliminating staff while CPAs are in tax season and client tax audits are occurring."
Sharkey added that for fund managers, this has the potential for fewer rules and regulations, so for now, it's business as usual, with managers keeping their eyes and ears open to what's coming down the pike so that they can be compliant.
How technology is changing the industry
Of course, new technology is being rolled out all the time, and Sharkey said artificial intelligence and other technologies constantly play a role in what they do as reporting agents and administrators. Kaufman Rossin uses best-in-class systems for its accounting because they have all the bells and whistles needed to keep track of their client portfolios, capital call and distribution events and more.
For example, Sharkey said many private equity firms invest in real estate, logistics and cold storage facilities, which comes with new challenges. Thus, the managers need systems in place to account for those operations and let administrators do the accounting and financial reporting for them.
"We're starting to leverage AI into some of the work we're doing," Sharkey added. "Leveraging technology and people can be a real game changer for [managers] and their investors as they balance complexity and focus on returns to their investors."
A new generation of investors
As the population ages, more and more younger investors are entering the scene. Sharkey said lots of investment professionals are coming up with new ideas and concepts, and they're bringing with them a following of new investors. According to him, this new breed of investors is looking for bigger returns in a shorter amount of time.
"That's why I noted we're seeing lots of new venture capital," Sharkey said. "They have a three-to-seven-year time horizon to make investments and have better tolerance for risk. These new managers attract younger investors, but at the same time, traditional investors don't mind making allocations of their portfolio and investing with them. They've been following the same path for years and making allocations to these new strategies can help maximize their returns."
Investors aren't panicking
As far as the economy, Sharkey said investors really haven't been panicking. He works with a lot of funds in the startup phase, and it's been business as usual. Of course, people don't know what all the recent moves mean, like the new tariffs, potential for reduced regulations, and the widespread government layoffs.
Sharkey said a recession could happen, but maybe these changes could have a better impact on the economy a year or five years down the road.
"I don't see smoke signals for doom and gloom," he added. "I'm just noting that change creates volatility, which creates opportunity for people to find new investment strategies. We don't know what impact the end of the Ukraine/ Russia war or the new tariffs will have on the global economy."
Sharkey also said things are just too much of a roller coaster right now, so investors and managers are just moving forward, with funds not really reacting to the daily news.
Read the full article at Hedge Fund Alpha.
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