The hedge fund trends for the rest of 2022 will be shaped by a range of factors, and for the first time in 2 years, COVID-19 is not the primary focus.
Just as the world - and the markets - were ready to find a way to live with the reality of COVID-19, another crisis couldn't wait to emerge: inflation.
And in this an environment where things are more volatile and the public is more socially conscious than ever, hedge funds must rethink their strategies for investing and attracting clients.
This creates both challenges and opportunities for hedge funds.
Combine that with the growing importance of technology, hedge funds have a lot to consider for 2022. Below are some of the trends to watch.
According to a HedgeWeek survey, 47% of emerging and start-up hedge fund managers with less than $250 million in assets say capital raising in the current environment is harder now than it was a year ago.
On a similar note, 64% of hedge fund managers of all sizes said attracting investor flows is the single biggest challenge that emerging and start-up managers face.
There are a variety of reasons for this, including an uncertain market, a smaller's firms lack of an established track record, as well as the lack of on-site engagement with a hedge fund, particularly around due diligence, as a result of COVID-19.
In those cases, for the larger firms with track records and ones where audits have been performed at pre-COVID, they are more likely to stay top of mind for investors, and they will be in better position for raising funds.
Still, the current sentiment is quite a contrast to what Donald A. Steinbrugge, founder and CEO of marketing and consulting firm Agecroft Partners, said last year.
He believed the next 15 months (September 2021-December 2022) will be the “greatest asset-raising environment in the history of the hedge fund industry.”
Last year, the world's top 20 best performing hedge funds brought in a record $65.4 billion for their clients. This number represents nearly one-third of what the industry as a whole brought in, $176 billion.
In 2022, the results have been mixed; there are certainly winners and losers.
As an example, technology-heavy funds have suffered more losses, while funds in commodities have done quite well.
And overall, despite challenges in raising funds, it is the smaller and emerging hedge funds that lead the way in optimism.
According to a HedgeWeek poll of European fund managers, two-thirds surveyed said performance was in line with or exceeded expectations.
Additionally, 84% are either somewhat or very positive about their performance for the rest of the year.
Inflation is at its highest level in 40 years, and inflation can negatively impact company earnings and stock performance.
The ongoing conflict between Russia and Ukraine adds to the inflationary concerns, as energy and consumer prices skyrocket.
However, it's not all bad news. Hedge funds that placed bullish bets on commodities are seeing huge gains. New York-based hedge fund, Soroban Capital Partners, has made several hundred million dollars since February.
And according to an analysis from hedge fund research and intelligence organization, PivotalPath, hedge funds as a group have historically thrived at different points in the inflation cycle.
The analysis showed that once interest rates reach an elevated level (about 3%), all hedge fund strategies, tracked as a group significantly outperformed the S&P 500 index. Also, when the rates go back down, all hedge fund strategies outperformed equities along the way.
According to a PwC report, around one-fifth (21%) of hedge funds surveyed are currently investing in digital assets.
Of those hedge funds invested in digital assets, their average percentage of their total hedge fund AUM is 3%.
What’s more, 86% of hedge funds currently investing in digital assets planned to deploy more capital into that asset class, and 14% planned to maintain the same level of capital.
And from an EY Survey, 31% of hedge fund managers planned to add cryptocurrency to their portfolios in the next one to two years.
The recent executive order signed by US President Joe Biden, calling for federal agencies to analyze the impact of digital assets on financial stability and security, further boosts the role of digital assets in the economy and investment space.
That being said, cryptocurrency is extremely volatile, as Bitcoin has lost more than half its value this year. Hedge fund managers must have the patience, knowledge, and a manageable tolerance for risk if hoping for long-term success.
2022 will be a notable year for women in hedge fund management.
Never before has a woman (let alone two) planned to launch her own fund and start with over $1 billion in assets, according to some bankers’ and investors’ predictions.
Hedge fund managers, Mala Gaonkar and Divya Nettimi, will be leading those $1+ billion firms, respectively.
Though women are making great strides, only 80 of the thousands of hedge funds in operation are run by women, according to the Kresge Foundation.
Check out this Bloomberg article on some of the other women in hedge funds making an impact.
The pandemic, societal issues, and climate change impact the public consciousness, and many people (including investors) feel they can no longer sit idly by.
According to a Barclays survey, 22% of investors prioritize ESG when deciding which hedge funds to allocate to. Given current trends, this percentage is likely to increase over time.
Yes, there’s an opportunity to attract investors by promoting ESG funds, and it’s profitable.
According to EurekaHedge, ESG funds outperformed non-ESG fund based on annualized returns over the last three-, five, and ten-year periods (10.59%, 10.3%, and 7.5%).
The 2% management fee of total assets and 20% fee for realized gains was a longtime industry standard, but that’s no longer the case.
According to Hedge Fund Research, in Q4 2020, hedge funds on average charged a 1.4% management fee and 16.4% performance fee. That is down from an average 1.6% and 19% a decade ago, respectively.
Fees on average may be lower, but that’s no reason to be discouraged.
Fund managers with solid track records can still command higher fees, and there is a lot of opportunity out there to raise assets and thrive in the current market.
Hedge funds can also find ways to cut costs and spend more time on revenue-generating activity, which will be explored in further detail in the outsourcing section below.
In early 2021, one of the biggest hedge fund news stories was GameStop (GME).
At the time, hedge funds shorted their positions, and when this news broke out, retail investors joined together to purchase more stock, boosting the share price.
Hedge funds that bet against GameStop took quite a hit, so much so that a London-based hedge fund, White Square Capital, shut down.
While there haven’t been any GameStop-like moments since, that event in some ways laid out a blueprint for future retail investor “flash mobs.”
While potentially lucrative, shorting is very risky. Hedge funds need to be aware of the risk not just from rising share prices, but also from future flash mobs. They need to have a plan to mitigate the risk.
Having access to quality data and reporting is more important than ever, as well as having it right at your fingertips.
To stay competitive, hedge funds need to make full use of technology, optimizing efficiency in all processes:
When looking at specific ways to optimize in terms of technology, here are a few points to consider:
At Empaxis, we help hedge fund get the most out of technology by providing them with a cloud-based digital platform, TAMP1, that lets them see all reports and data in one spot.
In addition, we help hedge funds automate their workflows, speeding up turnaround times, reduce errors, and cut costs.
Hedge fund managers can do a lot, but they can’t do it all by themselves.
With rising costs and falling fees, managing everything in-house puts an extra burden on hedge funds. Outsourcing is a way for hedge funds to relieve that burden.
According to speakers at a conference for hedgeweekLIVE North America, the pandemic lockdown accelerated the trend toward outsourcing for hedge funds.
Alex Prylucki, managing partner for the investment advisory consulting firm LEVVR, pointed out that the benefits of outsourcing are a lot greater than any one single individual a firm can hire.
He also added that with outsourcing, firms can take advantage of time zones difference for outsourced activity. For example, US hedge funds can have trade reconciliations done overnight by service providers in Asia.
At Empaxis, our hedge fund clients leverage us for overnight trade reconciliation, with the help of our dedicated team in Delhi and Kolkata. Clients really appreciate having reconciled reports first thing in the morning.
The hedge fund trends show a mix of opportunities and challenges that lie ahead. Hedge funds can continue their success in 2022 by mitigating the risk when it comes market volatility, cutting costs, leveraging tech, and incorporating digital assets.
By taking advantage of our outsourcing solutions, automation services, and TAMP1 platform, hedge funds can slash their costs while improving long-term overall efficiency.
As mentioned before, above hedge funds can do a lot, but they can't do it alone, nor should they. When it comes to those challenges, Empaxis wants to help.