UK consultant sees significant upswing in ‘first time’ hedge fund investors

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Toby Goodworth, bfinance

Hedge funds are attracting greater numbers of ‘first-time’ allocators, with “unusual amounts” of fresh investors showing an interest in the space, according to London-based investment consultant, bfinance. 

New interest has been growing since Q4 2020, accompanied by an increase in activity from clients with existing hedge fund portfolios. 

Toby Goodworth (pictured), Head of Risk & Diversifying Strategies at bfinance, commented that prior to the end of 2020, the focus of his team was more on absolute return multi-assets than hedge funds, but following Q4 2020, “it was almost like a light switch turned on, and interest has been very solid ever since.” 

bfinance is an investment consultancy headquartered in London that advises global institutional clients with a combined AUM of USD215 billion. 

“We normally find that the die is quite cast when it comes to hedge fund allocation – you either use them and have a clear reason why you’re using them, or you’ve thought about it in the past and you’ve decided not to use them – so new allocations to hedge funds are relatively few and far between,” Goodworth commented. 

bfinance clients looking to make their first allocation to hedge funds want to reduce or control their equity exposure, and do not want to go into fixed income to do this due to low yields and inflationary risk.  
 
In the recent past, Goodworth explained, private markets might have won out over hedge funds in terms of their appeal in this situation, but now with hedge funds delivering increasingly attractive returns, clients are saying they need liquid alternatives in their portfolio to moderate their private market allocations.  

Hedge Fund Research (HFR)’s main Fund Weighted Composite Index, a monthly measure of 1400 manager hedge fund’s performance, gained 10.03 per cent between January and June 2021.  

Goodworth’s clients, both new and existing, are looking at a number of different hedge fund strategies, including event driven funds.  Research by bfinance published in June showed that event driven managers posted a first quarter composite return of 7.3 per cent, their strongest Q1 performance since 1993, mainly due to the rapid uptake of M&A activity since Q3 2020.  

Clients are also showing an interest in multi-strategy market independent hedge fund strategies. Goodworth commented that the appetite for these was strong “simply because they’ve got a lot of tools in the toolbox. Clients don’t necessarily want one specific type of strategy like event driven, long short or CTA, they want diversified sources of return in their portfolio. 

“Multi strategy market independent hedge funds are becoming increasingly appealing to clients as they are not explicitly convex strategies – with clients expecting to lose money in order to get a payout in bad times. That strategy can be mixed with strategies that are a little more ‘all weather’, that do well independent of equity markets, but do slightly better when equity markets are struggling.”