Q4 2019 - Alternative Investment Outlook for Q4 2019 and Early 2020

Institutional investment in hedge funds is up 18% in the first half of this year compared to the same time period in 2018, according to published reports. At a recent EisnerAmper-hosted alternative investment roundtable, attendees learned about some of the industry trends anticipated for the remainder of this year and early 2020.

Here are a handful of findings:

Investors Continue to Demand Hedge Funds

Investors across the board, including institutions, led by banks and insurance companies, along with family offices/high net worth individuals, are interested in allocating to hedge funds for various reasons. They include the opportunity to cash in on volatility, getting access to uncorrelated assets, protecting their capital by generating alpha on the downside and more.

Strategy Spotlight

Investor preference for hedge fund strategies varies with some solely sticking to fundamental long/short equity managers while others favor more niche offerings. Geographically, European and Asian managers have gained significant traction amongst investors globally.

In addition, they have also increased their receptiveness to alternative investment strategies beyond the traditional hedge fund strategies such as private credit, real estate, cannabis and more.

To accommodate investor demand for such strategies, EisnerAmper can confirm an increase in launch activity in both the hedge fund space and private equity, specifically an uptick in both collateralized loan obligations (CLOs) and credit funds.

“On the West Coast, we have seen an increase in activity in Southern California both on the hedge and private equity side,” said Eugene Tetlow, a senior manager based in the firm’s San Francisco office. “However, funds are also taking far longer to launch as they look to secure capital.”

Institutions Prefer More Concentrated Portfolios

Institutions, particularly large investors, are expected to have more concentrated allocations, hence reducing their hedge fund holdings, to both improve their purchasing power with managers and also reduce their risk of dilution from over-diversification.

Hedge Funds Continue to Offer More Diverse Structures

Due to continued investor demand for liquidity and transparency, hedge fund managers are accommodating them by offering diverse structures and products including 40 Act Funds, UCITS, separate managed accounts (SMAs) and flat fee commingled funds. However, these structures require more operational bandwidth by the managers given their offer of more frequent liquidity.

Fees

Managers are expected to continue to offer more attractive fees to lure investors, including different fee models/share classes based on investor’s appetite to lock up capital.
“The previous industry standard 2/20 model is being replaced with 0/30, 1.5/15, 1/10 and forms of hurdles for performance fees to kick in that have not been seen before,” said David Goldstein, a director in EisnerAmper’s Financial Services Group based in New York.

“Additionally, many managers offer different fee models/share classes based on an investor’s appetite to lock up capital.”

Conclusion

Given the increased investor interest in both hedge funds and various other alternative investment strategies, the industry should be poised for growth in the near future. However, managers are going to have to continue to accommodate them by offering various structures that boast more transparency and liquidity, along with offering them attractive fees.

Engaging Alternatives – Q4 2019

• Considerations for a Private Equity Fund Investing in Real Estate
• From Hedge Fund to Family Office
• Hedge Fund Accounting Update
• IRS Releases “Frequently Asked Questions” and Revenue Ruling on Virtual Currencies
• Ireland Plans to Become Domicile of Choice for Private Equity Funds Investing in Renewable Energy Assets
• Alternative Investment Outlook for Q4 2019 and Early 2020