Alternative Investment Industry Outlook for Q2 and Beyond

Despite flat hedge fund performance in the first quarter of 2018 due to market volatility, investors globally including various institutions, family offices and high net worth individuals are on track to continue allocating this quarter and through the rest of 2018.  Due to the volatility, along with concerns about a possible correction, allocators appear to favor macro strategies to provide downside protection. In addition, they continue to eye a handful of other strategies, including quantitative, Asia-based, and sector-focused long/short equity managers, particularly in health care and financials. However, the continued investor interest doesn’t go without ongoing pressure for managers to accommodate limited partners by lowering their fees and creating customized offerings.  

INVESTOR OUTLOOK

Hedge Fund Spotlight

EisnerAmper has heard from both clients and prospects that investors have been paying more attention to hedge funds this quarter to capitalize on the market volatility.

“Last year, people were wondering why they were paying all this money to a hedge fund when they could simply buy an ETF,” said Phil DeRosa, managing director of EisnerAmper’s Connecticut office.  “With all this volatility, you just might want someone who can trade around these markets.  Investors are now looking for hedge funds and investment vehicles that engage in a wide range of trading, including making bets that markets will fall, to actually live up to their names and offer protection, or hedges, against falling stock markets.  That could mean, for example, buying stocks that didn’t benefit from the bull market and thus are less likely to fall as sharply as the broader index.” 

Capital introductions professionals from both boutique and top-tier brokerage firms also confirmed that macro funds appear to be a favorite amongst investors due to market volatility. Besides the general consensus on macro funds, along with quantitative, Asia, and long/short sector managers, they noted strategy preferences amongst allocators on various continents.  

Here are a few favorites from investors across the globe:

• U.S. investors like equity quant, credit distressed, relative value, volatility arbitrage and niche strategies in the emerging manager space. There has also been an uptick in conversation around ESG investing.
• Europeans are looking at managers that run European, Asian and emerging markets strategies with a focus on directional equity. They also favor niche strategies and UCITS structures. 
• Finally, in Asia, Japanese family offices -- who typically rely on their private banker or brokerage house for allocating -- are investing in low-volatility products through the bank’s platform. Additionally, smaller Japanese family offices who use their brokers’ “wrap” accounts, are investing into daily liquidity multi-asset products to ensure full discretion on their investments. Typically, these smaller family offices have between 10-30% of their assets in hedge funds.  Meanwhile, Singapore investors continue to add hedge funds to their portfolios and are seeking to diversify across asset classes since many were over-allocated to equities.

Private Equity Spotlight

In addition to hedge funds, investors are also paring back their long-only exposure in both equities and fixed-income in favor of private equity, private credit and real estate.

EisnerAmper has observed that insurance companies are one investor group that is increasing its allocation of capital to private equity.

“Across our client base we have seen large insurance companies make significant commitments to private equity funds, and I’m sure we will continue to see more of this,” said Anthony Minnefor, a partner in EisnerAmper’s Financial Services Group based in New Jersey.  

ALLOCATOR PRESSURES

Continuing since the first quarter of this year and even the last few years, investors continue to pressure managers to lower their fees. Hence, managers accommodate them by creating customized offerings including separately managed accounts and funds of one to protect their bottom line.

Jeffrey Parker, partner in EisnerAmper’s Financial Services Group, said the firm is seeing more mini-master structures than in the past due to lower operating costs and also because hedge fund managers face fee pressure from investors.   “There is more pressure on fees,” he said. “Fees are often lower than in the past.  Some launches offer reduced fees for higher investment amounts.  We are also seeing models that seek to align managers and investors, such as more of an incentive fee and less of a management fee.”

CONCLUSION

With the first half of 2018 almost behind us, hedge fund investors and managers alike are anticipating more volatility looking ahead and are positioning their portfolios accordingly. In addition, managers will continue to succumb to fee pressures from allocators and create customized structures to satisfy their demand.  Meanwhile, looking ahead at private equity and less liquid investments, these funds are expected to thrive mainly due to investor demand. 

Asset Management Intelligence – Q2 2018

• A Refresher on Broker-Dealer Expense Sharing Agreements
• The Fund Administrator’s Perspective: Real Estate Funds Poised for Robust Growth
• Technical Corrections Provisions Impact Partnership Audit Rules
• Alternative Investment Industry Outlook for Q2 and Beyond
• GDPR: How Asset Managers Can Comply by May Deadline
• Considerations for Establishing an Investment Fund in the Cayman Islands