Year after year, Agecroft does an excellent job bringing together a mix of funds, allocators, and service providers for their hedge fund allocator conference. Here are the top takeaways from Agecroft's "Gaining the Edge" in 2019:
- Hedge funds are growing through performance.
As one panelist mentioned, 16 of the last 18 quarters had net outflows. Also, there were more fund closures than launches in the past few years. But the industry is now at ~$3.5B. So growth is there, just not from across the board allocation flows.
- ETFs and Private Equity were two gorillas in the room. At best, institutional investors are holding their hedge fund allocations steady. Money has moved from active public market strategies to passive strategies. Private equity, private credit, VC, real estate, and infrastructure investing have also enjoyed allocation flows.
- After four years, we're still "late in the cycle." The reason institutions have held their HF allocations is the expectation that the class should protect in the event of a recession or meaningful market downswing. For at least the past four years, the recession is always just over the horizon. Nobody wants a recession, but a downturn could bee a boon to the HF industry — IF HFs can actually outperform in such a market downcycle.
- Long Short Equity is out of favor. The change in favor relates to the shift to passive. Any strategies with a high beta component are seemingly not desirable to the institutional allocation panelists. They are just not willing to pay high fees for beta.
- Exotic strategies are in vogue. Reinsurance, Art Investing, Volatility Strategies, CLOs, and Crypto were all seriously discussed. Any alpha-generating non-correlated strategy will get a meeting.
- Hedge Funds as a replacement for Fixed Income. There was a lot of discussion on investing in a world of negative interest rates. Many institutions appear to be using various hedge fund strategies as a replacement for fixed income to meet their performance targets because various credit strategies can exhibit similar correlation and volatility profiles as that historically provided by fixed income. That is before quantitative easing took over the world.
- "2 and 20" is dead unless you're huge. There is a great duality afoot regarding fees. On the one hand, allocators are refusing to pay 2 and 20 like fees to 99% of HF managers. On the other hand, they will pay more than 2 and 20 to the elite 1% of managers. The irony is that most of the allocation flows have gone to the 1%.
- AI is the new Bitcoin. Two years ago, every conference moderator had a question about Blockchain and Crypto; the stock answer was "we're considering it...". Now the prevailing questions center on how funds are using Big Data and AI/Machine Learning. The answer is, "we're looking into it..."
As a sponsor of Agecroft's "Gaining the Edge" hedge fund allocator conference in NYC, for the fourth year running, Vidrio Financial is proud to support the sharing of valuable intelligence regarding the global hedge fund marketplace.