Economic recovery boosts hedge fund appeal
Dina de Angelo, Pictet Wealth Management
A normalising economy and a supportive regulatory framework is expected to entice growing numbers of wealth mangers back into hedge funds, although it is likely to be a gradual process
Many commentators are expecting a comeback for hedge funds in the private wealth sector.
Société Générale and other big banks predict a return to the core-satellite model, with large allocations to bond and equity-based low-fee exchange traded funds at the centre, and the diversified outer reaches of a portfolio containing increasingly important clusters of hedge funds plus real estate and infrastructure exposure.
Hedge fund legend and founder of Optima Fund Management, Dixon Boardman, remains cautiously optimistic, believing stretched valuations available to long-only managers could potentially spur interest in the long/short community from private clients.
Often boutiques have an edge in long/short equities as well as niche credit and event strategies
“While institutions tend to gravitate towards the large multi-strategy funds, there is still a firm demand among private investors for more performance-oriented managers,” says Mr Boardman. “That segment of the hedge fund universe includes a component of newer, smaller boutiques. Often their edge is in long/short equities as well as niche credit and event strategies.”
The average performance by hedge funds in the four years following the credit crisis may have warranted some “hasty criticism”, believes Dina de Angelo, director at Pictet Wealth Management.
Back on the menu
Yet despite this, institutional assets managed by hedge funds are at an all-time high, with opportunities now being identified by wealth managers for their clients. According to Pictet, these will supported by clients’ willingness to take on more risk in a ‘normalising’ economy, a supportive regulatory framework and the prospect of higher interest rates.
These feelings are echoed by Alina Kanygina, head of Europe sales at SuMi Trust Global Asset Services, the fund servicing arm of Japan’s Sumitomo Mitsui Trust Group. “Investment into hedge funds requires high levels of due diligence and technical evaluation skills,” she says. “Hence we have seen many high net worth individuals and family offices stepping away from the hedge fund industry and focusing on real estate, private equity and other fundamental investments in the search for yield.”
The return in risk appetite for hedge funds will depend on increasing regulation, greater transparency and disclosure, coupled with overall market recovery, adds Ms Kanygina.
“With record low interest rates and increasing rebound of economies, plus unrest in emerging markets, it will become more difficult to hunt for yield,” she says, predicting an increased pipeline of European equity fund launches in 2014, responding to investor demand. Longer lock-up credit vehicles could also prove attractive to family offices, she says.
“Therefore we could expect hedge fund investment confidence to be returning slowly over time. It will take several years of global economic recovery until we again see pre-crisis level allocation to hedge funds.”
Although hedge funds tend to do well in positive economic cycles, the asset class also offers clients a cyclical hedge that works in line with a cautious outlook. “There has been a rising demand from our professional investors to increase their exposure to hedge funds going into the start of 2014,” says Iain Tait, head of the private investment office and Partner at London & Capital.
Those with a typically balanced portfolio are raising allocations gradually from 5 to 10 per cent, he says.
But not all are convinced that the high-flying ‘Alpha Papas’ will return to private portfolios.
“In a retrocession-free world, we expect passive management to gain additional prominence amongst private clients as an extremely cost efficient investment for delivering beta,” says Stefan Jaecklin of consultancy Oliver Wyman. “This will place a heavier burden on actively managed funds seeking alpha, making it harder for hedge funds to recover from their currently tarnished reputation.”
Additionally, the expected continued appetite for liquid investments will also hinder any potential recovery, which hedge funds may benefit from.
But even the slightly cynical Mr Jaecklin is reluctant to write off the alternative universe altogether, believing a small number of hedge fund players who can deliver a sophisticated approach will continue to be loved by the wealthiest elite.
