Do Hedge Funds Deliver What They Promise?
Marcus Storr, Head of Alternative Investments, FERI Trust GmbH
“The largest 15% of hedge funds manage 90% of the
total assets figure.” – MARCUS STORR
The year 2022 is one of the most turbulent years in the last decade, not only from an economic point of view but also from a political one. In this environment, there are several trends in the hedge fund industry that we have observed.
Competition for talents The boom in technology development has enabled hedge funds to develop new computer-based quantitative strategies as well as strengthen their operation and execution capability. However, it has resulted in strong competition for talent between hedge funds and technology companies. The two industries are involved in a high-stake war for talent, hiring skilled mathematicians, physicists and computer scientists from each other. According to Revelio Labs, there has been a notable uptick in industry crossover recently, after hedge funds fell behind Big Tech between 2012 and 2014. The hedge fund titans such as Two Sigma, Citadel and Bridgewater possess special competitive advantage thanks to their size, and most probably their ability to pay.
Growth and distribution of hedge fund assets under management FERI estimates that at the end of the second quarter of 2022 the hedge fund industry managed around $4 trillion in assets, with 66% of the assets under management belonging to hedge funds in Americas, 20% belonging to hedge funds in Europe, the Middle
60
East and Africa, and 12% belonging to hedge funds in the Asia Pacific region.
Total assets under management have been increasing every year since the Great Financial Crisis in 2008, suggesting strong demand for hedge funds globally. However, the demand for UCITS-compliant hedge funds, which are popular amongst European investors, dropped sharply in the first quarter of 2022 with a decline of 4.5%. For most German institutional investors, hedge funds remain a sector only to be touched with caution. Based on the results of a 2022 survey by BAI, the main German lobbying body for the alternative investment industry, only 16% of the surveyed investors held investments in offshore hedge funds, with 17% invested in ‘liquid alternatives’ i.e. hedge-fund-like strategies in a UCITS format, whereas most of the investors loved real estate (77%) and private equity (75%).
The distribution of hedge fund assets is strikingly disproportionate, with a small number of funds managing most of the assets. The largest 15% of hedge funds (each with more than $500 million in assets) manage 90% of the total assets figure.
Hedge funds in elevated volatility environment
When global hedge fund returns are placed next to global equity returns, it is obvious that in the last decade hedge funds have been able to capture gains in up-markets and reduce losses in down-market. In 2022, with both equity and bond markets suffering from heavy losses, well managed hedge fund performance has been flat or even positive. Within the hedge fund industry, performance varies among different strategies in a wide range. Fundamental equity long/ short, for example, has had a difficult year this year down 10%, which is still much less than the loss incurred in equity markets, thanks to the significant alpha contribution of the short book. In contrast, systematic macro and CTA funds have been flying since the beginning of 2022 and delivered on average returns of 14%, with many trend following strategies achieving high double- digit performance. All in all, it is safe to say that a market environment with elevated volatility, frequent dislocations and high dispersion like the one in 2022 provides an excellent environment for the hedge fund industry. THFJ
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