SECTION 3
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Private wealth sentiment towards hedge funds appears decidedly mixed. But attractive liquidity and return profiles – coupled with burgeoning opportunities stemming from cryptocurrency upheaval – offer the chance of inflows.
- Private wealth investor sentiment towards hedge funds is somewhat mixed
- Over 25% of private investors surveyed will increase exposure, 20% will decrease
- However, family offices are overwhelmingly hedge funds’ most common target
By Hugh Leask
Hedgeweek
Roughly 27% of private wealth investors plan to increase their hedge fund allocations next year, with another 27% set to maintain their allocation to the asset class, according to Hedgeweek data.
However, 20% of private wealth investors intend to decrease their allocations in 2023, while the remaining 27% do not invest in hedge funds at all.
Those numbers contrast sharply with appetite for other alternatives: 50% of private wealth investors are set to grow their private equity exposure in the next 12 months, with another 50% planning to maintain their allocation. At the same time, 36% and 29% say they will increase their holdings of private debt and real estate assets, respectively.
Security
“There is definitely a big trend into illiquid markets,” observes Patrick Ghali, managing partner and co-founder of Sussex Partners. “Many of the large private banks have raised huge amounts of money – there is a sense of security and stability, though whether it actually turns out to be the case, we will see down the road.”
However, Ghali also suggests it is not all one-way traffic within the private sphere. “There is more of a push, ironically, on the hedge fund side towards very liquid products, and even daily liquidity. On the on hand, many private wealth investors are very happy to lock capital up for a long period of time. On the other hand, they want a lot of liquidity.”
This apparent ambivalence among wealth managers towards hedge fund managers is not reciprocated. Asked which investor groups and intermediaries they hope to engage with in the coming year, family offices are overwhelmingly hedge funds’ most common target: overall, 89% of all managers – and 95% of emerging hedge funds – hope to connect in 2023.
Damage
Such a drive may yet yield inflows in the coming year, particularly from some private wealth investors.
Richard Byworth, managing partner and head of liquid alternatives at Syz Capital, says there is a view among certain family office investors that larger, brand-name private equity firms have “done themselves reputational damage” from a fee perspective, particularly by charging on non-drawdown capital.
“This is a valid question that comes up in due diligence meetings and conversations with seasoned private equity investors,” Byworth observes. “To some degree that pushes cheques a little bit more towards the direction of hedge funds.”
With close to 40% of private wealth investors already set to increase their allocation to global macro strategies, it is a major opportunity for some managers.
Byworth says: “With hedge funds, you have a better liquidity profile for, in some cases, the same sort of return profile in a rising rate environment. You may have a big-name private equity fund targeting 8-12% with an 8-year lock-up, whereas you can now move into macro hedge funds and get similar returns without that illiquidity. The traditional 60/40 allocation has blown up in your face this year, so I think people who are coming from public markets, and that level of liquidity, will feel more comfortable with hedge funds.”
Digital divergence
The digital assets space is emerging as a major fault-line between private and institutional capital. More than half of private wealth allocators now plan to increase or maintain their allocations to digital assets hedge funds in 2023, in stark contrast with institutional respondents, none of whom currently invest – or plan to invest – in the sector.
While the implosion of the FTX Exchange in early November dealt a huge reputational blow to the crypto sector, “our focus is not on the directional volatility of crypto, but on the alpha opportunity created by dislocations,” says Brooks Ritchey, senior managing director, co-chief investment officer, and portfolio manager at K2 Advisors.
“The volatility is what creates the dislocations, and massive relative value opportunities, which is an area where, over the next two or three years, there should be good performance gains possible. Those arbitrage opportunity, relative value trades are areas which hedge fund managers are looking at.”
Despite the FTX blow-up, Man Group’s systematic hedge fund unit Man AHL is reportedly launching a crypto-focused hedge fund imminently.
The inefficiencies, fragmentation, and lack of institutional capital means crypto potentially heralds “a multiplier effect” on the alpha available within traditional finance, notes Richard Byworth, managing partner and head of liquid alternatives at Syz Capital.
“Fundraising may be painful. Some people will look at it as a catastrophic raging bonfire unlikely to die down anytime soon. But shrewder investors will look for those who have analysed hedge funds, and the risk around hedge funds, and who can understand the value proposition, and identify and capture that alpha.”
This article first appeared in Hedgeweek’s December 2022 Insights Report, Investor Interest
