Hedge funds – Cover story
measured by those funds reporting to Aurum’s Hedge Fund Data Engine – which have grown by $35.3bn (£28.4bn) since the end of 2022 to stand at $2.9trn (£2.3trn). This was driven by net positive performance of $79.4bn (£64.1bn), which was partially offset by net outflows of $44.1bn (£35.6bn). Seven of the eight master hedge fund strategies saw growth in assets under management, led by multi-strategy funds and fol- lowed by equity long-short vehicles. Multi-strategy fund growth was driven primarily by positive performance and modest cap- ital inflows.
Where to look But while hedge funds could well offer something for institu- tional investors, given the vast nature of the hedge fund uni- verse, where should institutional investors be looking? Inves- tors often cite finding the right hedge fund, at least those unfamiliar with the hedge fund world, as something akin to finding a needle in a haystack. “We continue to favour strategies such as global macro and CTAs [commodity trading advisers] as well as relative value strategies,” says Ghali, offering an insider’s guide. He cites these being attractive due to “their non-correlated profile” and the fact that they are able to provide protection in challenging markets such as last year.
“Should we end up in a sustained, long-term bull market, mod- els should be also able to adapt to this,” he adds. However, Ghali also notes: “We are cautiously positioned and as such want some protection in our portfolios as we think there are a lot of risks on the horizon.” Although it should be noted that CTAs have had much publi- cised difficulties. To this, Ghali counters: “While 2023 has been challenging for some, but by no means all CTAs – we have some that are up 7% this year – we tend not to look at short-term performance but rather act like investors and not traders.”
And he adds: “It is hard to judge any strategy on a few months of returns. While short-term performance tends to be head turning, it often isn’t that informative.” Ghali also discusses the type of strategies that interest him: “We also are looking for strategies that are cash efficient and hence can benefit from the tailwind of higher rates on their unencumbered cash positions.” Cooper has an enthusiasm for global macro in his hedge fund wish-list. “Multi-manager platforms and global macro strate- gies have generally attracted inflows and have tended to per- form strongly over the medium term,” he says. However, Cooper adds: “Within these strategies there is a scar- city of supply of high-quality managers. Larger, more estab- lished funds, with good track records, are able to secure more favourable economics and terms.”
On trend
Global macro is attractive for several reasons. But the key one is if the trend toward what is often termed de-globalisation con- tinues, there is a belief that individual economies will become less connected, and monetary and fiscal policies naturally will follow. This could lead to greater dispersion in the perfor- mance of asset classes globally – a hugely rewarding backdrop for global macro managers. But the economic environment is changing. This potentially could see the environment move away from that attractive pic- ture for hedge funds. After the high inflation experienced in 2022, is the case for macro hedge funds still intact? “We believe so,” Meisan Lim says. “First, we suspect risks are skewed to either matching or exceeding current inflation expectations,” she says. “As a group, macro funds have a wide range of resources to identify mis-pricing and can choose from a variety of instruments to maximise their payout.” Lim notes other tailwinds support the thesis that a macro strat- egy will do well in an environment susceptible to inflation sur- prises. “Rather than focusing on promoting maximum em- ployment as it did in the low-inflation era, the Federal Reserve is now forced to favour combating inflation by raising the Fed funds rate,” she says. Furthermore, Lim adds that when quantitative easing flushed the markets with liquidity and drove investors to reach for yields higher up the risk curve, concentrated beta-driven port- folios were more attractive than a diversified portfolio with many alpha sources. “Now that monetary tightening is in effect and interest rates have risen, macro managers are in an oppor- tune position to benefit from greater alpha opportunities and diversification of assets and geographies,” she says. So the message is clear: institutional investors should be look- ing towards hedge funds to help boost and diversify their portfolio.
Not all hedge fund strategies fill the gap created by the breaking of the traditional
stock-bond correlation. Ben Cooper, Cardano
Issue 127 | October 2023 | portfolio institutional | 19
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