Performance, or rather a lack thereof, during the volatile markets this year, is the most significant headwind facing hedge fund managers heading into 2023. With no incentive fees coming in, many fund managers will face a tough time sustaining their operations.
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Performance, or rather a lack thereof, during the volatile markets this year, is the most significant headwind facing hedge fund managers heading into 2023. With no incentive fees coming in, many fund managers will face a tough time sustaining their operations.
Exacerbating this problem is the likely loss of assets to redemption, and therefore management fees, as allocators seriously review their existing investments.
Jack Seibald (pictured), global co-head of prime brokerage and outsourced trading, Cowen, comments: “Wide ranging drawdowns this year caused many allocators to hit the pause button months ago, and as they review existing allocations into year end, the likelihood is that a wave of redemptions will hit the industry and many managers will experience a loss of assets in addition to the drawdowns they’ve experienced. We’ve already seen a number of headlines about wind downs of previously well-regarded funds, and we shouldn’t be surprised when more are forthcoming.”
He notes that many managers will need to thoroughly review their firms’ operations as the lack of sufficient revenue is not just a 2022 issue, but one that will continue until high-water marks are achieved in 2023, or perhaps later.
Whether allocators maintain their exposure to the managers they are with will largely depend not just on their performance into year end, but also on the results produced by their peers with comparable strategies or managers with completely different ones. The market turbulence this year has given rise to increased performance dispersion as managers have demonstrated varying abilities to able to navigate the storms.
Seibald comments: “As allocators have the opportunity to sift through the wide dispersion of results that the hedge fund industry will produce this year, we suspect investment dollars will flow more freely again to those managers who’ve demonstrated the ability to navigate the difficult markets in 2022 and generate material outperformance based on disciplined and repeatable investment processes.”
As managers adjust to the new environment, outsourcing is expected to accelerate across the hedge fund industry as established managers look to rein in costs to mitigate the fee struggles this year and emerging firms turn to third parties to help them get off the ground.
Seibald notes: “Established fund managers will be opting for outsourcing as a means to contain costs and benefit from operational efficiencies. This year’s experience has once again reminded managers that fixed infrastructures are costly to maintain, particularly in lean periods, and that engaging credible outsourced providers can not only solve the cost issue, but in many instances can also add a level of expertise not easily replicated internally with limited resources.”
According to Seibald, as investment professionals associated with funds that shut down or are impacted by reduced near-to-intermediate term fee income look to start new fund businesses, the new launch market could also drive demand for outsourced solutions in the next few years.
Seibald says: “Outsourced trading is increasingly in demand as it allows fund managers, whether they’re established or new launches, to scale more efficiently than hiring and managing new headcount and infrastructure, and it also enables them to access expertise in supplementary global markets and asset classes.”
