AIMA CEO Jack Inglis sees hedge fund “renaissance” next year as ESG, blockchain and digitalisation accelerate changes

Digital trends

2021 will see an “acceleration of trends” across the hedge fund industry, according to Jack Inglis, CEO of the Alternative Investment Management Association, with the sector becoming more digitalised and more socially conscious, as managers play an “integral part” in the economic recovery following the coronavirus crisis.

Hedge funds are set for a “renaissance” next year as investor interest in the sector rebounds following 2020’s momentous events, driving a “major rethink on portfolio allocation” among clients.

“During the peak Covid-19 market volatility in the first half of 2020, hedge funds, on average, halved the losses incurred by equity markets and balanced portfolios,” Inglis said in a commentary this week.

“As has been the case where markets have sharply corrected, hedge funds continue to demonstrate their ability to minimise risk and deliver performance better than any other asset class.

“This performance has not gone unnoticed with investors.”

At the same time, continued growth in ESG (environmental, social and governance) trends will further drive developments in investment products and strategies, the hedge fund industry body’s chief observed.

The current “contractual” push towards ESG between investors and managers will give way to a “regulatory” drive, amid the onset of new rules in the EU Sustainable Finance Disclosures Regime (SFDR) taking effect in March.

Meanwhile, the remote working environment and increased reliance on digital communication during the Covid-19 pandemic is opening up the prospect for new hedge fund operating models, in the context of a broader digitalisation of the industry.

Hybrid working in a variety of locations has flagged up the need for enhanced cybersecurity within firms. Inglis also pointed to an increased use and integration of alternative data in investment processes in the period up ahead.

“The coming 12 months will see the hedge fund industry continue to move towards a more quantitative outlook with more firms looking to invest in alternative data and next generation tools like machine learning and blockchain technology,” he noted.

“The past year has seen more hedge funds emerge with an increasing number of investors examining opportunities in blockchain and the distributed ledger technology (DLT) space.”

While manager and investor alignment has evolved in recent years – reflected in the growth of customised and bespoke solutions, such as separately managed accounts and funds of one – new arrangements and partnerships such as co-investments and Special Purpose Acquisition Companies (SPACs) point to further changes in relationships.

Inglis suggested the hedge fund industry is now moving “away from the product-led environment of the past to a marketplace increasingly populated by more bespoke investor solutions and value advisory services.”