Trends Watch: July 27, 2017

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks to Hal Lehr, Chief Investment Officer, Aithon Capital.

What is your outlook for the hedge fund industry?

I am very optimistic on the future of the hedge fund industry because there are many new and talented emerging managers who outperform.

Allocators can benefit tremendously from these new managers. Historically, allocators who dove deep and thought outside the box and made investments in new and dynamic talent made this industry vibrant and profitable and successful.

Many allocators today do not do this work. They take the easy path and just invest in large existing managers, who frequently fail to perform. This has been a problem for many years. Investors, including pensions and endowments, will start holding allocators accountable. It has begun to some extent. When this happens at a significant level, the hedge fund industry will reshuffle, re-allocate, and become vibrant and productive again – and then I will be really optimistic on the hedge fund industry. Right now, it is somewhat stale and at a place of dangerous stagnation.   Allocators who think outside the box and invest in new talent will revitalize the industry and do well.  

What is your outlook for the economy?

Momentum will continue to carry equity markets for a bit of time. We believe commodities and macro will be exciting and better places to find opportunity. Declining excess liquidity along with lower money growth and a flattened yield curve will put downward pressure on some asset prices. We like new technologies that have real applications. Technologies that lower extraction costs for resources are interesting to us and positive for the companies that develop them. The overall economy has mixed forces. I am cautiously watching. I think certain emerging markets, especially in South America, present interesting opportunities over the next few years.  

What keeps you up at night?

Bad policy decisions by government officials over the past 16 years, bad conduct by some financial institutions, and the worsening crisis in the global pension system. Pensions are massively underfunded. The funding gap is in the trillions of dollars. This hurts hard working pensioners and if not repaired will result in continued cuts in assumed rates of returns, causing reduced pension benefits, increased taxes by municipalities, and pain for the working American. Bad policy over the past nine years punished the savers and rewarded the very entities and individuals that caused the financial crisis. The pension crisis is worsening and concerns me greatly. Current debt to GDP also concerns me as do current interest coverage ratios.