The hedge fund (HF) industry had a challenging year in 2018, as both returns and flows were negative, which led to a decline in overall assets under management (AUM) for the first time in 10 years, according to the latest survey of the global hedge fund industry conducted by our Capital Solutions team. However, the picture was far from uniform, suggesting a number of paths forward for a more successful 2019.
Hedge fund performance declined in 2018, due mostly to HFs that had high exposure to equity markets. Adding to the disappointment in performance was the fact that hedge funds generated negative 3% alpha overall for the year. In fact, the June-November period represented one of the steepest drawdown periods in history.
Source: HFR, Strategic Consulting analysis
1) 2018 figures are estimated as of 1/16/19. 2) % shown is of the initial AUM for that strategy at the beginning of the period.
On the positive side, at least for systematic strategies, we found a trend of assets moving towards hedge funds with a systematic approach. Within the 20 largest hedge funds, quantitative and hybrid strategies, those with meaningful quant and as well as discretionary businesses, saw significant gains from 2013 through 2018 and now represent 20% of overall industry AUM.
While quant as a category will continue to see inflows, even bigger areas for growth may include Equity sector-specific and market neutral strategies, distressed credit, fixed income relative value, and even discretionary macro.
Source: All figures refer to Barclays Strategic Consulting survey results only.
Note: Net interest is a proxy for investor interest: % of respondents who plan to increase minus % who plan to decrease allocations: numbers exclude intermediaries (Consultants and FoHFs)
Investors remain committed to hedge funds despite the recent poor performance. For 2019 we expect to see a significant amount of reallocations, roughly $350 billion of ‘money in motion’ from investors’ reallocations across strategies and managers. However, on a net basis, we are projecting outflows from the industry of $20-50 billion.
In order to get an understanding of investors high level plans for 2019, we asked them about their priorities for their HF portfolios in 2019. Very few investors indicated plans to tactically change their strategy mix to reflect the new environment, rather the largest segment of investors focused on structural changes, such as diversifying the risks in their portfolio (expanding the strategies or geographies in their investment portfolio), reducing the number of manager relationships they held, or rotating managers, but keeping their strategy/geographical mix the same.
For instance, according to survey results, approximately one-third of investors plan to invest in a strategy that they are not currently allocated to and another approximately 40% plan to increase allocations to geographies they are less exposed to, such as Asia Pacific.
Source: All figures refer to Barclays Strategic Consulting survey results only
The survey suggests managers who will succeed in 2019 and beyond will likely fall into one of two categories:
Finally, the survey indicated investors are choosing to make multiple allocations to managers that they already have a relationship with. Product expansion may lead to a new class of “super” asset managers, which is similar to what happened in the private equity industry.
If you are interested in reading Crossing Currents: 2019 Global Hedge Fund Outlook study, which is available to clients of Barclays Investment Bank, or if you would like to learn more about Capital Solutions’ services and reports, please contact email@example.com.