The global hedge fund industry is facing a tough environment, where returns are harder to come by while competition is heating up.
This might lead to some consolidation in the sector, according to Jack Inglis, Chief Executive Officer of AIMA.
“We’ve read the headlines about investors perhaps deserting hedge funds and it is definitely true that asset flows are slowing,” Inglis told the AIMA Australia Annual Forum 2016 last week.
Inglis quoted research from Preqin which indicated that the global hedge fund sector had seen US$ 34 billion in net outflows over the first half of 2016, with the majority of outflows occurring in the second quarter.
In the same period last year, the industry still recorded US$76.3 billion in net inflows.
“Given the numbers that we have available for the first half of 2016, I think you could argue that certainly on the surface of it, it looks like asset flows have gone into reverse,” he said.
“There will be some consolidation in the industry as investors are concentrating their investments in fewer managers.”
We see a trend in a number of clients who have been very anti-hedge funds in a lot of ways considering alternative beta and risk premium strategies. It addresses some of the issues around fees, there is a big sensitivity there and also around transparency.
Although the hedge fund sector includes a wide variety of strategies, the average hedge fund performance has disappointed in the last 12 months and this has been a primary driver of redemptions.
But increasingly hedge funds are also facing competition from smart beta, or factor-based investment strategies.
“Liquid alternatives are here to stay and I think the crowding out by liquid alternatives is going to be tremendous and it is going to put a lot of pressure, which we are already seeing, on the hedge fund industry,” Travis Schoenleber, Managing Director of Cambridge Associates in Australia, said.
“What does that mean? You probably are going to see a little bit of bifurcation in the traditional hedge fund industry in that some of the larger asset owners and manager will build out platforms and multi-strategy, one-stop shop type of situations.
“And on the other side, [we will see] more specialisation, where you are getting unique alpha, because it is just so much easier to access cheaper beta through a variety of methods and strategies,” he said.
This will put further pressure on fees he said.
“We went from 2 plus 20 to 1 plus 25 to 1 plus 15 now. You are going to have to justify your performance fee more than you will have to now.
“So it might be a 1 per cent [management fee] and a 15 per cent [performance fee] with a cash plus 2 per cent hurdle” he said.
Georgina Dudley, Head of Implemented Consulting at JANA, said that smart beta strategies are also attracting new clients who previously did not want to invest in hedge funds.
“We see a trend in a number of clients who have been very anti-hedge funds in a lot of ways considering alternative beta and risk premium strategies,” she said.
“It addresses some of the issues around fees, there is a big sensitivity there and also around transparency.”
“It is a bit of a game-changer for some of these clients in terms of an entry into hedge funds and [they are] building their own understanding and appreciation of the strategies and techniques they can use,” she said.
But she also argued that for other clients smart beta strategies were merely an addition to existing portfolios.
“I think alternative beta has really evolved from trying to replicate hedge funds to [become] a diversifier and value for money,” she said.
“A number of clients of ours are looking at complementing their existing hedge fund exposures with alternative beta.”
The AIMA Australia Annual Forum was held on 13 September in Sydney. For the full newsletter of the forum, please follow this link.
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