Top hedge fund trends this year will include higher assets, a reduction in returns, and a greater focus on US investors by UK managers, according to Agecroft Partners.
The industry may also not adopt CFA Institute performance standards, for the time being.
Agecroft, a broker-dealer, says it has attempted to predict 2020 hedge fund trends based on contact with many institutional investors and hedge fund organisations.
Here are some of the predictions.
Hedge fund industry assets to reach new all-time high in 2020.
There is an improvement in sentiment towards the industry. As net redemptions from hedge funds decline, Agecroft forecasts industry assets to grow by 3% over the next 12 months stemming primarily from hedge fund performance. However, declining fees will cause overall revenue to decline.
Reduction of expected returns for a diversified hedge fund portfolio.
As we begin the new year with historically low interest rates and equity markets near peak levels, investors anticipate beta and carried interest to contribute less to fund performance over the next few years thereby reducing the overall expected returns from hedge funds.
Large rotation of assets.
There has been large dispersions of performance both across strategies and among managers within strategies. Underperforming managers will experience above average redemptions due to disappointing performance from what investors consider to be high priced investment structures. Among strategies that win over investors will be those that blur the lines between private equity and hedge funds. Most of these are private lending/specialty financing and reinsurance, which offer an attractive alternative to traditional fixed income. But there are concerns about how these will perform in a market downturn.
Pension funds will increase allocations to hedge funds due to low interest rates.
Agecroft says most public pension funds have an actuarial rate of return assumption around 7.5%, so with interest rates and credit spreads near historic lows, pension funds will look to hedge funds to enhance returns by, for example, allocating part of their fixed income allocation to hedge fund strategies like distressed debit, specialty financing, structured credit and relative value fixed income. With the yield on the aggregate bond index in the mid-2% range, the bar is low for hedge funds to add value on a risk-adjusted return basis.
UK hedge funds, the second largest market in the world, will have greater focus on North American investors due to Brexit.
The European Union was created to provide free trade among its members. In so doing, it also put non-EU members at a disadvantage, Agecroft says. This is certainly true in the hedge fund industry where non-EU firms face high hurdles to comply with the Alternative Investment Fund Managers Directive. With the UK leaving the EU, UK hedge fund firms may focus more on North American investors and significantly less on those in continental Europe.
5% of funds could attract 80% to 90% of net assets within the industry.
Hedge funds with high quality product offerings must also have a best-in-breed sales and marketing strategy that deeply penetrates the market and builds brand.
Almost no adoption of new CFA hedge fund performance standards.
Donald A Steinbrugge, found and CEO of Agecroft, says he strongly supports the CFA Institute’s effort to create and implement performance standards in the hedge fund industry and believes it is the right organisation to lead this charge. But, unfortunately, the new performance standards for the hedge fund industry have failed to address some of the most important issues regarding hedge fund performance reporting and so there will likely be limited acceptance of the new standards until they are redrafted.
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