For the 4th year running, Vidrio was a sponsor of Agecroft’s “Gaining the Edge” hedge fund allocator conference in NYC. Agecroft does a very nice job bringing together a mix of funds, allocators and service providers. Below is a summary of my observations from this year’s event:
- Hedge funds are growing through performance. One of the panelists mentioned that there have been net outflows in 16 of the last 18 quarters. Also noted was that there have been more fund closures than launches in the past few years. But the industry is now at ~$3.5B. So there is growth, but 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.
- We’ve been “late in the cycle” for four years. 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 all four of the years we’ve been attending this event, this 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. This 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 strategy that is non-correlated and alpha generating 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 seem 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 fixed income historically provided before quantitative easing took over the world.
- 2 and 20 is dead, unless your huge. There is a great duality afoot regarding fees. On 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 at this conference every moderator had to ask a question about Blockchain -> Crypto. And the stock answer was “we’re considering it...”. This year it was how fund are using Big Data -> AI/Machine Learning. And the answer is “we’re looking into it...”