Panelists discuss Covid-19, ESG and investor appetite in “extraordinary” year for hedge funds
This year’s Hedgeweek LIVE Europe digital summit opened with a broad overview of the prevailing hedge fund industry landscape in 2020, exploring a range of themes including the shifting perception of hedge funds among investors, the impact of Covid-19 on market opportunities, the increased importance of ESG among both managers and allocators, and the start-up environment for fledgling funds.
Underlining the importance of emerging managers within the hedge fund industry, Jack Inglis, CEO of the Alternative Investment Management Association, said those firms managing USD500 million and below comprise the majority of managers, and described new funds as the “lifeblood” of this business.
“Every manager – even the most successful ones out there – were emerging managers once,” he told Wednesday morning’s panel.
The session, titled ‘Rolling Back the Years’, heard how hedge funds have continued to be perceived as a “risky” asset class by investors. Speakers also noted how the industry has had to grapple with the challenge from passive investment products, along with the unprecedented central bank intervention post-2008 and the decade-long bull-run in equities, which was eventually disrupted by the Covid-19 pandemic earlier this year.
That has made for a “very challenging” environment, said Oliver Dobbs, founder and chief investment officer of convertible arbitrage-focused Credere Capital, who also touched on the perennially-thorny issue of fees.
“The customers are used to getting really good returns with really low volatility and really low fees,” said Dobbs. “Until recently they thought that would go on forever.”
Offering the allocator’s perspective, Marc de Kloe, partner at Theta Capital Management, observed how larger managers have been able to “weather the storm” amid the hedge fund industry’s mixed performances of the past few years. “They’ve been able to out-survive their smaller counterparts,” he said.
But amid the “extraordinary” events of 2020 - in which equities displayed their vulnerability and sovereign bond markets continue to offer negative yields - Inglis suggested investors may revise their recent stance on hedge funds.
“This was the first year that hedge funds have delivered significant alpha, but on the upside for once,” said de Kloe, which contrasted with 2008, 2011 and 2015 when hedge funds outperformed on the downside.
He pointed to the strong performance of sector-specific strategies such as healthcare and technology, along with distressed-focused funds which often hinge more on process-based risk, rather than market-based risk.
“That’s where the hedge fund skillset comes into play as well,” he added.
Similarly, Dobbs noted that certain fund strategies become “fashionable” according to the ebb and flow of markets, adding: “In order to have growth, you either have to be having returns or be in an area which is seen as differentiating at the moment.”
The session also explored the rise of ESG (environmental, social and governance) factors in investing – an area “only going in one direction” according to Inglis, and which de Kloe sees as a potential “return enhancer” for managers.
“ESG might be the saviour of the hedge fund industry,” de Kloe added, explaining how it forces firms to consider not only their investments, but also their company behaviour, HR policies, and issues such as gender equality. “These are all things that matter.”
Rounding off the discussion, veteran manager Dobbs - who launched his relative value and arbitrage-focused fund in partnership with fund platform Trium Capital in 2017 - explored the options available for those looking to strike out on their own, either through joining a large multi-strategy fund manager or setting up on a distribution platform.
“For me it was a combination of opportunity and control. When I worked for large hedge funds I was at the behest of someone else. It comes to a point in life where you want to back yourself. That becomes a driving theme.”
Dobbs conceded that until relatively recently it had been “getting harder and harder” to raise money. “Going to a platform or a multi-strategy organisation makes it easier to get an allocation, to start trading and building a track record.”
He compared being a star trader with the role of a top-flight footballer arriving at a Premiership club, who now has to juggle contracts and relationships with the manager and chairman. “All that can change,” he added.
“If you can start with some backing and you maintain your track record in some shape or form, that is a viable opportunity. If you get those returns, people will then give you money. But it’s a difficult balance when you give up control.”