Q1 2019 - Alternative Investment Outlook for Q1 and Beyond

INTRODUCTION

Following a challenging Q4 for the hedge fund industry as a whole, many prominent managers have shut down or converted to family offices, especially those in the equity space due to poor performance that lagged the S&P 500. As a result, the space is anticipated to see new launches from employees of these shuttered funds, while those still investing in equities could face outflows from institutional investors and family offices. On the other hand, the areas that appear to be poised for inflows from allocators include global macro, Asia-focused offerings and, on the less liquid side, qualified opportunity funds.

STRATEGY OUTLOOK

Global macro

Global macro appears to be one of the most promising strategies on the premise that investor diversification into discretional macro strategies could mitigate market volatility risk to overall portfolios.

“Although performance in these strategies has not met investors’ expectations, the current backdrop for discretionary global macro investing has been improving,” said Phil DeRosa, managing director of EisnerAmper’s Connecticut office. “Monetary policy normalization is a key factor in the improving backdrop for the strategy, but high asset valuations also play into the strategies’ important role within a portfolio.”

He added: “While it can be debated if equity-market valuations have reached so-called levels of ‘irrational exuberance,’ most investors would agree that the future path of equities is less certain. This is good news for discretionary global macro investment managers, as any adverse moves, particularly in equities, would generally be accompanied by an increase in realized volatility. Historically speaking, discretionary global macro strategies have an inherent long volatility bias, and therefore can act as risk diversifiers in times of equity market stress.”

Asia

Despite 2018’s decline in the Asian markets and reduction in demand for Asian managers, at the start of this year, Asia appears to be the main focus for investors to deploy capital, putting aside the pending impact of U.S. and China trade policies.

“Across the hedge fund investor landscape, opportunities may exist as the International Monetary Fund reported that two thirds of world economic growth will come from Asia in the next five years,” said Grady Poon, head of financial services, EisnerAmper Singapore. “The Global Capital Markets Growth Index also indicates that the Asian markets could have the significant boom in the shares of global capital markets over the next few decades.”

Qualified Opportunity Funds

Institutional investors and family offices have also been heavily eyeing opportunity funds since investing through these vehicles provides developers and investors with tax-advantaged investment opportunities designed to spur local economic development.

“Since enactment, qualified opportunity funds (QOFs), the instrument to invest in qualified opportunity zones, have become a very hot topic,” said Lisa Knee, national leader of EisnerAmper’s Real Estate Private Equity Group. “Tax benefits include a temporary deferral of tax on gains, the elimination of up to 15% of the tax on the deferred gain and potential exclusion from tax on gain generated from the appreciation of investments within the QOF.”

EisnerAmper has created a guide called Qualified Opportunity Funds: A Guide for Real Estate Investors to help real estate investors navigate this tricky terrain.

CONCLUSION

With 2019 just beginning and many big name hedge funds finishing their wind-downs, over the next few quarters the industry is expected to see a series of new launches from these employees who fell victim to the closures. Yet, capital raising for them will continue to be a challenge as allocators overwhelmingly have their eyes set on non-equity strategies. 

Asset Management Intelligence – Q1 2019

• What Are the Top Three Things U.S. Asset Managers Should Be Doing to Prepare for Brexit?
• Are You Ready for Your Annual Audit?
• Should I Market My Fund in Europe?
• The Impact of the New Interest Expense Limitation Rules on Trader Funds
• Alternative Investment Outlook for Q1 and Beyond
• Secondary Private Equity Market: Offering Flexibility Amid Brexit