Curious about how deal flows, regulations, alternative investments, geopolitical tensions, and other factors are impacting allocators today? Vidrio Financial journeyed to the AIM Summit in London, seeking insights into the evolving landscape of private credit, hedge fund strategies, and Bitcoin allocations.
By: Nick Bourne, Commercial Director, EMEA, Vidrio Financial
How are institutional investors navigating the increasingly intricate world of alternative investments as they reassess their portfolio asset mix almost halfway through 2024? To gain insights and gauge the market's pulse, we dispatched Nick Bourne to the prestigious two-day AIM Summit in London. Nick gathered some valuable takeaways from the event while combining that insight with Vidrio’s observations from our clients in the institutional investment sphere.
U.S. Elections: Is a Trump victory inevitable?
With the buzz surrounding the upcoming election season growing louder, the focus is shifting toward foreign policy, particularly amidst conflicts like the Ukraine-Russia war, Israel-Gaza tensions, and overall global unrest.
In the panel titled "Is a Trump Victory Inevitable?" featuring Charles Myers, Chairman & Founder, Signum Global Advisors, Greg Swenson, Chairman, Republican Overseas UK, Founding Partner, Brigg Macadam, and David Gibson-Moore, Chairman, Dalma Capital President & CEO, Gulf Analytica, the conversation delved not only into geopolitical issues but also the potential escalation of trade wars and the crucial role of overseeing the U.S. Treasury. It's a dynamic landscape with high stakes, shaping the future of global politics and economics.
One name that continues to rise to the top of the U.S. Treasury discussion, (if a change in the presidency does occur) is Scott Bessent, Founder, Key Square Capital. Transitioning from a background in investigative journalism, Scott has forged a huge career and formidable presence in the realm of global macro investing.
Recently, Scott joined host Kieran Cavanna from Old Farm Partners on the Thematic Investors podcast, which covered a lot of ground into current U.S. politics and what sort of outcomes institutional investors could see should a Republican or Democrat win the next four years. Be sure to listen to that podcast below:
https://www.vidrio.com/blog/thematic-investors-podcast-scott-bessent-global-macro-investing
Investments: Hedging and Mis-hedging:
From the discussion on politics, I moved to the next panel discussion between Nassim Nicholas Taleb, author of “The Black Swan”, Distinguished Scientific Advisor, Universa Investments L.P., and Julia Chatterley, anchor, and correspondent CNN International. In this discussion, Nassim focused on the concerns around fat-tail risks that exist and could impact the financial markets today.
For those who may be unfamiliar with the term, fat-tail risk (also known as a black swan) refers to the risk of an asset or portfolio moving more than three standard deviations from its current price. Many refer to this event as one that is impossible to account for but can turn allocator portfolios on their heads. For more on fat-tail risks, you can check out this Meketa pdf that we’ve found helpful.
Nassim emphasized the importance of managers having a vested interest in performance, highlighting that diversification alone is not a sufficient hedge against risks in the financial markets. The discussion shifted to artificial intelligence and its usage in institutional markets. I believe that overall, he thinks that it will be a net positive as AI takes on more jobs and streamlines bandwidth for allocators. However, caution will be needed so “BS” jobs aren’t created to replace the gains that AI has provided across investment teams, thereby undermining any benefits that investment teams would expect to observe. Vidrio detailed some of the finder points of artificial intelligence and machine learning for allocators and where the future is headed for institutional investors in a recent blog. This is a critical read for those in the investment industry that want to understand how the blending of institutional investment software will combine with human expertise.
Hedge Funds and the Golden Age of Private Credit
The 2024 Investor Compendium marks the fourth year Vidrio Financial and Alternatives Watch have partnered on crucial research on allocator trends across various asset classes. Findings revealed that hedge funds will still favor the ‘bigger is better approach’, with larger funds demonstrating superior performance and asset growth. You can download the full report here.
The themes from our Compendium research aligned well with the next panel at the AIM Summit entitled, "Which Regions are Leading the Hedge Fund Market?" This session was hosted by the Dubai International Financial Centre (DIFC) and featured insights from Justin Ng, Principal, King Seal Holdings (HK Single Family Office running an endowment model), Jim Iorio, CEO, UK & Head of European and Asia Business, ExodusPoint Capital Management, Ali Hassan, Senior Representative, DIFC Authority, and Tom Kehoe, MD, Global Head of Research & Communications, CAIA.
The landscape of hedge fund entry in the APAC region is diverse, but one thing remains clear: local knowledge is vital to success. Panelists agreed that fundraising can be tough unless you’re in the private credit space or concessions are being offered. Otherwise, investors are calling the shots on the investment terms, but keep in mind that there is a shortage of talent across the board, so analyzing performance may come with added risks.
From here, the discussion shifted to the United Arab Emirates, (UAE). Panelists agreed that the UAE is a hotbed for hedge funds, with over 60 new funds being established as a subset of a much broader community. Given how private wealth is climbing in the region, the industry around this space is nearing ~$5 trillion, with a mixture of startups and spinouts opening in the UAE. The question of the UAE’s recent removal from the gray market did come up, and only appears to be a small issue, as exhibited by the following discussion points:
- The Dubai International Financial Centre (DIFC) has doubled in size, and investors are working through the gray list issue with minimal headaches.
- Many institutional investors are making moves to the UAE to have boots on the ground and foster better relationships.
- India has also fostered agreements with the region, leading many to state that the best place to live in India is Dubai.
Where private credit is concerned Michael Fidalgo, MD, Signal Capital Partners, Nikos Latsos, Investment Director, Latsco Family Office, Suzana Peric, MD, Sourcing & Origination, Oaktree Capital Management LP, Leander Christofides, Co-CIO Global Special Situations, JP Morgan, came together on a panel aptly named "The Golden Era of Private Credit" to discuss how private credit is now a part of the investment pie. Their collective insights highlighted the growing significance of private credit as it takes over the traditional lending roles of banks, showcasing its remarkable adaptability and scalability.
Like the hedge fund discussion from earlier in the day, investors can dictate better terms and structures. Michael (Signal Capital Partners) also raised concerns about a potential future crisis in private credit, which could lead to stricter regulations and make lending and extensions more challenging. With the intense competition in the market, risk management is being overshadowed, emphasizing the importance for new investors to grasp the risks and demand increased transparency in these evolving markets.
Vidrio Financial recently provided insights into the rapid growth of private credit, highlighting the increasing popularity of both direct investments and co-investment strategies for asset allocations. A wave of new funds is emerging from traditional private equity firms, alongside an influx of hybrid credit opportunities that bridge the gap between corporate entities and asset-backed players. While some traditional players may struggle to capitalize on these evolving trends, multi-strategy investors are swiftly adjusting their strategies to seize opportunities in the private credit space.
The Future of Allocations
Risk and data pipelines were highlighted on the next panel that I attended, entitled "The Future of Asset Allocation – Predicted Trends and Shifts", with Borislav Vladimirov, Senior Macro Strategist, Goldman Sachs, Aaron Bennett, CIO, University Pension Plan Ontario, Dirk Willer, Global Head of Macro, Asset Allocation, and Emerging Market Strategy, Citi.
Aaron (University Pension Plan Ontario), kicked off the conversation by stating that UK funds are now fully funded and looking to de-risk their allocations with fewer alternatives and safer assets. Canadian funds are less mature, and the size of the annuity market is very limited, so the use of more alternative investments is typically necessary. There is a focus on cash flows across asset classes especially infrastructure, real estate, and absolute returns. Many pensions need valued partners that invest in both liquid and illiquid assets and have best-in-class liquidity tools, as cashflows and distributions can be choppy. Borislav (Goldman Sachs) also agreed with this assessment, as strong data pipelines are needed to power the new breed of artificial intelligence tools.
Vidrio has written about data management challenges and some of the top concerns for institutional investors, ranging from the unstructured nature of portfolio data to the reduction of Excel spreadsheets and more AI tools. You can read more on those subjects for institutional investors here, but this panel certainly resonated well with the solutions and services that we’re providing to some of the largest allocators today.
AIM Summit – Day 2 – The shift to Crypto and Digital Assets
Where optimizations in allocator transparency, data management, risk monitoring, advanced portfolio analytics, and more are being supported by a solution like Vidrio Financial, one area that remains murky for institutional investors is digital assets or bitcoin.
The second day of the AIM summit shifted to the world of digital assets, kicking off with "The Year of the Dragon for the Emerging Asset Class – Digital Assets", featuring Marian Laboure, MD, Deutsche Bank, Florian Rais, CEO & Founder, Criptonite Asset Management, Dr. Najam Kidwai, Co-Founder & CEO, C1 Fund.
Many on the panel agreed that crypto has become a permanent fixture in the institutional investment landscape and should be treated as any other alternative asset class. According to Marian (D, bitcoin has survived at least two winters, and asset managers are finally starting to warm to digital assets. Even with this warming, many are still questioning the utility of crypto and blockchain, and what the overall regulation will look like in the future. Certainly, for many on the panel, the U.S. has lagged in diagnosing the usage of crypto, and this has only added to the lack of clarity across the system.
Tim Draper, founder of DFJ Draper Associates & Draper Venture Network, believes that in 5-10 years bitcoin will be used to pay for everything. However, tokens only have value if they have a real use case. Tim believes that Bitcoin will become a unit of account and medium of exchange, with ~3 billion gamers driving usage of digital currencies to buy various items. These will be the bitcoin holders of the future. A few other thoughts about digital assets came from this event and can be summarized below:
- As stated, regulation is lagging, however, the Biden administration is starting to target bitcoin and miners.
- A 30% tax may be coming to miners in the future, which several agree could equate to a ban and kill the industry.
- 2023 saw a spend of $7,500 per bitcoin mined. Some argue that the bandwidth spent on Bitcoin mining would be better channeled into artificial intelligence advances for the investment community.
- Currently, there are only 24 publicly listed companies. M&A will begin to make sense to a lot of those in the industry as we move forward.
In Vidrio’s opinion, the adoption of digital assets is still fairly suppressed in the overall portfolio mix. From a transparency perspective, Vidrio can provide the reporting and analytics to assist institutional investment teams in tracking digital assets. However, we have not seen a significant acceleration in digital assets across our global client base. We believe that allocators will continue to monitor the situation across digital assets cautiously, but bandwidth in the short term will focus on artificial intelligence, private credit, UAE expansion, better risk management, and more.
Vidrio’s experience at the AIM Summit was extremely valuable, as we were able to network with leaders across the industry as well as hear about some of the largest themes impacting their strategic allocations for investors.
