By Angele Paris – The hedge fund industry began 2022 on a high note, with more than USD4 trillion in capital as managers steered the volatility and uncertainty of the protracted Covid years and the growing inflationary environment.
By Angele Paris – The hedge fund industry began 2022 on a high note, with more than USD4 trillion in capital as managers steered the volatility and uncertainty of the protracted Covid years and the growing inflationary environment.
Launching a fund against this background is not always straightforward, especially considering the additional complexity of rising regulatory scrutiny. However, given the right support and carefully selected partners, emerging managers can succeed in building out their investment strategy and raising the funds necessary to go to market.
Data from provider Hedge Fund Research shows the last quarter of 2021 favoured mid to smaller funds. Larger groups dominated inflows over the previous five quarters by Q4 2021 saw this trend reversing with the largest firms experiencing an estimated net outflow of USD7.4 billion, according to HFR.
Although the market environment may be considered challenging for some, Mark van der Zwan, Chief Investment Officer and Head of AIP Hedge Fund Solutions at Morgan Stanley notes in an article: “Rising volatility and performance dispersion create a fertile field for hedge fund managers, who found their footing again in 2021.”
However, he also cautions that, “the biggest challenge to hedge funds in 2022 will be the changing nature of market risk. Hedging unwanted market exposure has always been key to protecting alpha, but doing so has become more complicated and nuanced… In our view, investors would benefit from considering hedge funds constructed with diversified alpha sources and a strong risk management process.”
Regulatory hurdles
In addition to the shifting market environment, start-up managers must contend with the additional regulatory focus on these vehicles. Although this can be a challenge, according to a report by KPMG, “Regulation is also enabling new market opportunities. New fund vehicles are being introduced as jurisdictions compete for share of market growth, private and real assets are being accommodated to aid economic recovery, and newer capital markets are opening further to foreign investment and firms.” This, for example, includes developments in domiciles like Ireland and Singapore where new structure for private capital funds are being showcased.
But managers who wish to keep their vehicles in the US and those active in the market here may be in for some significant change. Earlier this year, the US Securities and Exchange Commission (SEC) announced it will be raising scrutiny of hedge funds. SEC chair Gary Gensler further confirmed it will be pushing for greater disclosure regarding several activities including cybersecurity risks and attacks.
Should these rules be enacted, start-up managers will have a heavier regulatory burden to contend with. Though not immediate, emerging managers must keep a close eye on the shifting regulatory framework.
In the firm’s regulatory outlook for 2022, Deloitte outlines: “firms should remain alert and engage with policymakers while their efforts can have maximum impact (before the final rule stage).
“Since firms are likely to live with the rules that are proposed in 2022 for potentially years to come, it is well worth their effort to engage with the process early and often.
Similarly, firms must not lose sight of their ongoing and impending obligations. In conjunction with new rulemaking, we expect regulatory enforcement to be more vigorous than in recent years. Given the gravity of some of the areas under regulatory consideration, 2022 might frame the business and regulatory environment for financial services in the United States for the foreseeable future.”
