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Are hedge funds back in favour?

David Stevenson, 09/04/2021

The asset class that has been demonised since at least the Obama administration when the president blamed hedge funds for the collapse of US car manufacturer Chrysler, is apparently coming back on investors’ radars, with a report suggesting that this year will see the first net inflows since 2017.

The Global Hedge Fund Benchmark Survey was conducted by the Alternative Investment Management Association (AIMA), city law firm Simmons & Simmons and US law firm Seward & Kissel.

Given that most hedge funds use equities as their underlying assets, a resurgence in equity markets was likely to prove beneficial for hedge funds. Also given that certain sectors and indeed particular companies really got hit hard by Covid, the long/short strategy that for many epitomises the hedge fund industry insured that many would prosper.

Navigating drawdowns by correctly shorting the losers and going long the winners seems to have gone down well with investors with the report stating that funds over the past 12 months had either met or exceeded their targets.

However, one of the major bugbears with the asset class remains, its sky high fees. The ‘2 and 20’ model has been amended but only slightly. The report found that among the main players, just 14 percent revised their fees down over last 12 month.

This fee concern was the reason for the very public divestment of one of the US’s biggest pension funds CALPERs of hedge funds. In 2014 the pension fund paid $135 million in fees for a 7.1 percent return. During that same time period, the S&P returned around 20 percent.

However, a renewed appetite for hedge funds is suggested by the number of new hedge fund in the fourth quarter of 2020, the highest level since Q4 2017. According to Ken Heinz, president of HFR, another hedge fund research provider, this was based on optimism regarding the US economic reopening and rising expectations for growth.

­­­As fundeye covered, it seemed that retail investors had triumphed over the hedge fund dons in the Gamestop episode, when a short position on the physical video game store proved costly as funds had to continue to hold their positions as the company’s stock rose rapidly.

However, according to Global Hedge Fund Benchmark Survey, most of the new hedge funds being launched are long/short equity strategies so even if firms got burnt during a few retail investor uprisings, the appetite clearly remains for this classic hedgie strategy.

The report even contains some insights into how hedge funds transitioned the Covid-induced working from home phenomenon. It states: “Universally, smaller managers have found the transition to working remotely a little less challenging than their larger peers. The larger (and the generally more international) the manager, the more complex the challenge of having to navigate a larger workforce and more complex operations.”

Mr Heinz, president of HFR, concluded: “Having navigated extreme dislocations and volatility in 2020, hedge funds are maintaining an intense focus on ongoing new strains of coronavirus as well as vaccination progress, while at the same time focusing on evolved risks for 2021 including interest rate sensitivity, increasing inflation expectations, and geopolitical tensions across North America, Europe and Asia. Managers positioned for these powerful trends are likely to lead industry performance and growth in 2021.”

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