“Cautiously optimistic”: New industry study finds hedge funds buoyant in 2021 after overcoming Covid challenges

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Hedge funds are “cautiously optimistic” on their growth prospects for the coming year, according to a new deep-dive industry study jointly published by the Alternative Investment Management Association, Simmons & Simmons and Seward & Kissel.

‘The Global Hedge Fund Benchmark Survey: Beyond the Horizon’ probed manager performance, investor sentiment, future challenges, and alignment of interests, among other things.

The wide-ranging study is part of an ongoing research series into the health of the hedge fund industry conducted by AIMA, the global trade body for the hedge fund and alternative asset management industry, together with law firms Simmons & Simmons and Seward & Kissel.

Its key findings suggest 2021 will see a further acceleration of trends, with the industry becomingly increasingly digitalised and more social conscious, and hedge fund firms playing an integral role in the global economic recovery from the Covid-19 pandemic.

Performance-wise, hedge funds either met or exceeded targets set by investors over the past year. But the study also found that performance dispersion has been a “prominent feature” across the industry – underlining the importance of manager selection and ongoing review.

“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 were able to balance their portfolios,” the survey found.

Looking ahead, the report said hedge funds are now “cautiously optimistic” regarding growth prospects for the coming year, with more than 70 per cent of all managers citing a positive confidence measure on AIMA’s Hedge Fund Confidence Index (HCFI), a quarterly global measure of hedge funds’ sentiment on business prospects for the next 12 months.

The research also delved into the myriad internal challenges confronting this industry. It found the key twin challenges for all hedge funds remain performance delivery (highlighted by 81 per cent of respondents) and capital raising (flagged by 78 per cent of participants).

Key person risk has risen to become the third biggest challenge among hedge fund managers, selected by 30 per cent of participants. More than a quarter (26 per cent) picked Covid-19 business continuity as major challenges, though just 15 per cent cited ESG objectives.

Observing the impact of Covid-19 on new managers, the report said: “Allocators are more comfortable working with hedge fund managers whom they have allocated to in the past or where they have a previous business relationship.

“With Covid-19 restrictions likely to remain in place for at least the first half of this year, those hedge funds who do not have the right investor relationships established will continue to be overlooked.”

However, beyond the pandemic, with investor appetite for hedge funds being among the strongest witnessed for years, the expectation is that the industry will post net inflows through this year as investors of all types increase their investment, the study noted.

“Hedge funds that can innovate and be flexible give themselves the best chance to succeed and grow.”

Specifically, the report showed allocators are set to continue to pour money into the industry in 2021, with some 95 per cent set to either increase or maintain their allocation to hedge funds.

It also touched on the often-thorny issue of fees, and the alignment of interests between investors and managers.

“Performance fees across the industry continue to hold up reasonably well with investors prepared to incentivise hedge funds that deliver for them,” the report noted, adding that across all hedge funds participants, the average incentive fee paid to hedge funds was 17.5 per cent of annual net  profits.

The report surveyed more than 300 industry professionals during Q4 2020. Some 82 per cent of those quizzed were hedge fund managers, accounting for around USD1.3 trillion in assets under management, with the remaining 18 per cent being hedge fund investors.

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