What do the subsequent 5 years maintain for hedge funds? We posed that query to greater than 300 fund managers and 120 institutional buyers in alternate options in mid-2018. Our survey and analysis revealed a number of fascinating developments.
1. No Longer the Largest Various Asset Class?
Based mostly on the trade’s viewpoint and our proprietary information, we predict that the hedge fund trade will develop by 31% within the subsequent 5 years, reaching $four.7 trillion in 2023. Though in share phrases that is the smallest anticipated improve amongst all the choice asset lessons we monitor, at $1.1 trillion, it’s the second highest degree of projected web capital progress, behind solely non-public fairness ($1.eight trillion), which we anticipate to overhaul hedge funds as the biggest alternate options trade at $four.9 trillion.
2. Extra Publicity to Illiquid Methods
Of personal fairness buyers surveyed, 79% anticipate to extend their allocations to non-public fairness by 2023, however simply 27% of hedge fund buyers anticipate to do likewise with hedge funds. Certainly, 16% anticipate reducing their hedge fund allocations. Though the anticipated progress isn’t particularly sizeable, neither is the share aspiring to shrink their allocations. As such, we foresee regular progress as most plan to maintain their degree of hedge fund publicity comparatively secure, supporting the pattern we’ve got seen lately.
three. Modest Progress in Hedge Fund Allocations: Not All Unhealthy Information
Given the sturdy returns and report distributions within the non-public capital sector, it’s little shock that buyers are starting to shift in direction of illiquid alternate options in an try to additional diversify and construct out extra refined portfolios. Nevertheless, the projections of comparatively modest progress in hedge fund allocations is probably not as unfavorable for the trade because the survey outcomes counsel.
Over the previous decade or so, we’ve got seen increasingly more buyers construct out more and more massive portfolios of hedge funds, with typically better publicity to hedge funds than to non-public capital belongings. For example, non-public fairness buyers sometimes allocate round 9%–10% of their portfolios to the asset class, in comparison with 14%–15% for the common hedge fund investor. Although we anticipate hedge fund allocations to stay comparatively static throughout many institutional teams, there’ll possible be a considerable amount of exercise, as buyers proceed to redeem and rebalance their holdings relying on market circumstances and tactical targets.
four. Non-public Wealth: Coming Again Round?
Requested in regards to the varieties of buyers energetic within the trade, 76% of surveyed hedge fund managers predict that the share of capital they obtain from establishments will improve. Notably, the biggest cohort (66%) of respondents imagine household workplaces will probably be extra worthwhile sources of capital, adopted by 52% who say foundations, and 46% who say each sovereign wealth funds and endowment plans. These figures examine to 38% and 36% for personal sector and public pension funds, respectively.
Once we think about the non-public wealth origins of the hedge fund trade, capital from high-net-worth people and households was vital. So it’s fascinating to watch how the trade seems to be coming full circle. After 15 years of institutional capital-fueled progress, there’s now an expectation that the mass prosperous will drive progress as soon as once more. To draw this capital, managers might have to adapt their product choices to accommodate the completely different wants of those buyers.
What does this all imply for hedge fund managers?
Regardless of speedy post-crisis progress within the variety of managers, the overall census of energetic hedge funds has plateaued since 2016. This coincides with a dramatic drop in new hedge fund managers coming into the sector annually and throughout every area. There are round 14,800 energetic hedge funds immediately, a determine that has held regular because the finish of 2017 and stays comparatively unchanged from the tip of 2015. What is going to occur to this complete within the subsequent 5 years? Managers are largely united within the perception that there will probably be additional consolidation within the trade between now and 2023, as cited by 91%, together with 26% that anticipate important ranges of consolidation. That is the biggest proportion amongst all various asset lessons.
Consolidation and challenges lie forward.
If our predictions show true, the variety of energetic hedge funds will both stabilize or shrink barely over the subsequent 5 years. Because the ecosystem of buyers evolves into one thing increasingly more advanced, so too will the calls for of those buyers. We subsequently imagine that the setting forward will current substantial challenges for hedge fund managers and that solely these that may show their worth to buyers and adapt to their altering calls for will survive.
Regardless of the challenges, there’s elevated uptake from non-US buyers.
As a area, North America has been the dominant supply of hedge fund capital, however 42% of respondents in our research imagine that the share of capital from North American buyers will decline over the subsequent 5 years as buyers from different areas ramp up their publicity to hedge funds. As compared, 64% and 59% predict that the share of capital from buyers in Europe and Asia-Pacific, respectively, will improve by 2023. Amongst rising markets, the biggest share of managers foresees an uptick in capital from the Center East (37%) and China (29%).
How hedge fund managers adapt and evolve to satisfy the wants of a (possible) considerably completely different investor base will (greater than possible) decide their success and longevity. Many might open native workplaces to accommodate a extra regionally dynamic investor pool, increase their vary of product choices, or put money into new know-how and approaches.
And know-how might present some solutions.
In relation to synthetic intelligence (AI) and machine studying, 88% of managers surveyed predict these methods will probably be of better significance throughout the trade in 2023. When requested which space of their enterprise stands to realize from advances in know-how, the biggest share (65%) of hedge fund managers cited fund operations. The measure of impression and the lifespan of recent know-how — equivalent to blockchain, cryptocurrencies, and large information in addition to AI/machine studying — stays to be seen, however the consensus is that these developments will enhance effectivity to find sources of alpha and lowering prices.
In any space, nonetheless managers select to evolve, it’s absolutely the act of evolving that can make all of the distinction. The historical past of hedge funds is proof that so much can change in simply 5 years.
For extra on various belongings, don’t miss the Preqin/CFA Webinar: 2020 GIPS Requirements for Various Investments.
Amy Bensted will probably be sharing extra insights on the way forward for hedge funds and various belongings on the 72nd CFA Institute Annual Convention from 12 to 15 Might 2019 in London.
In the event you favored this submit, don’t overlook to subscribe to the Enterprising Investor.
All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially replicate the views of CFA Institute or the writer’s employer.
Picture credit score: ©Getty Pictures/undefined undefined