Reasons to be cheerful

18 Jun 2021

Tom Kehoe is global head of research and communications at the Alternative Investment Management Association (AIMA)

In the face of an unprecedented global disruption arising from the Coronavirus pandemic, assets under management for the hedge fund industry continue to break new records. Optimism across the industry is the highest it has been for several years underpinned by several factors.

Firstly, hedge fund performance. There are some variations in average returns between the data aggregators that measure industry performance, but the result is resounding. Last year was a good year in which hedge funds justified their fees.

Depending on the data provider the average hedge fund reported +12% (HFM Global) to +17% (Preqin). Further, they delivered essential downside protection in March last year capturing a substantial part of the upside in the ensuing recovery.

And the strong performance has continued this year with the average hedge fund gaining 6% net of fees as of the end of March. Performance dispersion remains prominent with some hedge funds continuing to deliver exceptionally strong returns.

Exceeding expectations

This performance has not gone unnoticed among investors with recent reports highlighting that allocations to hedge funds have either met or exceeded the expectations of investors. The strong hedge fund sentiment is translating into net flows to the industry.

The first two months of this year saw the industry receive $25bn (£17.9bn) in new investment making it the best start since 2014 (according to eVestment).

Increasingly investors are looking to the qualities of hedge funds for portfolio risk management as well as the ability to deliver performance better than most asset classes. In a further boon to industry prospects, with yields from fixed income investing becoming more challenging, investors are turning to hedge funds given their ability to deliver higher returns.

Hedge funds appear to be riding a wave of optimism sweeping the globe as it moves closer to exiting the Covid-19 pandemic. Further reasons for the industry to be cheerful include hedge fund appetite among investors being among the strongest witnessed for several years.

The launch environment is exceptionally strong especially among hedge fund firms that have a pre-existing relationship with investors. While travel and in-person meetings are still the preferred option, allocators have been able to adapt their due diligence practices to the virtual environment with a greater level of confidence now being shown in the virtual out- reach. There have been some examples of new business being successfully onboarded via solely virtual means.

The second half of this year should see the industry receive a further shot in the arm as the world looks to open its borders amidst vaccination rollouts increasing in scale and travel restrictions being lifted.

The expectation being that the strong hedge fund sentiment among institutional investors globally translates into further net investment into hedge funds as managers and investors travel and meet in person.

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