Hybrid hedge strategies
AIMA research throughout 2021 highlighted increasing demand by institutional investors for hedge funds that could offer exposure to both public and private markets, with a particular interest in private credit and venture capital. The strong performance of private equity and credit in 2021 has made more investors curious about its diversifying potential for their portfolio, leading to increasing allocations to these fund types.
The investor base for private credit will continue to expand next year with private wealth and retail capital becoming a more prominent part of the sector’s capital raising activity. Fund managers that offer exposure to these markets will be rewarded with greater allocations, albeit have to also contend with handling the operational challenges of having a greater number of strategies and tailored products.
Continued movement away from manager led products to investor tailored solutions:
The alignment of interests between managers and investors continues to strengthen as investors play a more active role in portfolio construction. The next year will see continued movement away from manager-led products in favour of more tailored solutions and value advisory services.
New partnerships are also emerging with co-investment arrangements becoming more popular in both private and public markets while Special Purpose Acquisition Companies (SPACs) are being increasingly taken up by hedge funds.
Volume of regulatory scrutiny to increase:
Regulatory change is an evergreen issue for the alternative investment industry, but the growing volume of regulatory scrutiny coming down the pipe in 2022 means it is expected to be a headline issue for market participants for at least the next year. Scheduled reviews of major regulatory frameworks in the EU – including AIFMD, MiFID II and short selling regulations – are coming alongside new ESG-focused rules and ongoing regulatory divergence with the UK. Across the Atlantic, the SEC has signalled its intent to re-open the rule book for hedge funds, invoking the need to improve market transparency. Regulators and policymakers across APAC are also far from complacent and compliance teams across the region are expected to have their hands full for the foreseeable future.
Hedge fund industry renaissance:
Buoyed by strong performance by hedge funds over the past two years, investors are taking notice of the industry’s renaissance, investing in both public and private markets as they seek diversification away from low-interest bond markets and high valued equities. With most forecasts for the coming year predicting continued market volatility as well as the introduction of monetary tightening to curb the threat of higher inflation; this could spell trouble for bond and equity markets and economic growth. Forecasts for returns from the 60/40 model next year are low to single digits.
By contrast the case for active investing in this environment grows. The benefits of investing in alternatives, (for their ability to diversify the portfolio as well as the opportunity to select fund managers that could deliver returns better than what is available from passive investing) will continue to attract capital over the coming year and ultimately could see assets in the hedge fund industry to be closer to $5 trillion over the coming 12-18 months.
