Hedge funds – Feature
tors equate the industry with long/short equity managers as they make up the lion share of the assets.”
Strategies and manager selection were key to success this year, Ghali argues. Managers that rode the cheap liquidity wave have obviously suffered and investors are asking themselves if gains in prior years may have been due to beta rather than alpha. Our focus remains on alpha strategies.”
Regulatory headwinds Some hedge funds face challenges on other fronts, specifically from regulatory demands – which is something of a recurring theme – and could shape the industry in different and poten- tially unknown ways. “Headwinds remain in the form of new regulatory and compli- ance demand, particularly coming out of the US as well as higher inflation levels and interest rate tightening, likely to impede on a firm’s ability to manage their business,” AIMA’s Kehoe says.
The US in particular has witnessed an unprecedented number of new industry proposals, which, if enacted, would make man- aging businesses extremely challenging and expensive for some funds. Indeed, not a week seems to go by without another proposal being put forward by the US Securities & Exchange Commission, in what amounts to a radical overhaul of existing market practices for the private funds industry. European and Asia Pacific hedge fund managers are also hav- ing to consider a raft of new regulation being discussed which would impact how they manage their business. It could, though, be argued that the impact of regulation on hedge funds is overstated – or that its impact is more nuanced. “Regulation is ever changing and that is nothing new for the industry,” Ghali says.
“It tends to mean that smaller funds struggle more with the reg- ulatory burden, and it means that the minimum assets under management to start a fund tends to creep up over time,” Ghali adds. “In that sense it may hinder talented smaller managers from taking the leap. But generally, funds are able to adapt.” It is clear that hedge funds are part of a growing environment propelled by potential investor interest. And the ongoing bear market beset by geopolitical and macro-economic turbulence means that capital preservation and outperformance are top priorities for investors. This is reflected in AIMA’s study of how hedge funds feel about the future. According to the AIMA Hedge Fund Confidence Index, the average measure of confidence in the economic prospects of their business in the coming 12 months is +25.4 – the highest score reported by hedge funds since this index began two years ago. Firms that demonstrated the highest levels of confidence were
I do not agree with the notion that hedge funds have
had a bad year. Patrick Ghali, Sussex Partners
EMEA-based fund managers, with those in the Middle East r eporting an average score of +31, almost eight points higher than the average reported by North American-based funds. The focus on the Middle East is no flash in the pan, as it appears to be part of a wider trend. “Over the past 12 to 18 months, we have seen an increasing inflow of managers set- ting up in financial centres such as the Dubai International Financial Centre, to support their marketing efforts and to attract and retain portfolio manager talent relocating from the US, Europe and Asia,” says Muneer Khan, Middle East partner at law firm Simmons & Simmons.
Sovereign influence
Khan has been a keen observer in the tracking of investor capital.
“The high scores for the [Middle East] are possibly due to increased oil and gas revenues, as well as more focused gov- ernment economic diversification efforts, leading to managers attracting more assets under management from sovereign and sovereign-related investors in the region,” he says. Such a trend should potentially make investors sit up and take notice.
It has led to some commentators dubbing the Middle East, and Dubai in particular, as the new hedge fund hotspot. Light reg- ulation in the region, or lighter than elsewhere, may well be a contributing factor.
It all adds up to a reasonably upbeat situation for hedge funds: one that could well offer an array of opportunities to investors, if they seek to take what is on offer. A key part of that attraction is again the D word. “We expect positive sentiment for certain hedge fund sectors as investors consider their long-term strategic diversification,” a global survey of asset owners published by Bfinance concluded.
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