Mike Jacobellis, Chief Investment Officer, New Holland Capital
The big continuing trend is consolidation and the bigger leaders gaining market share from everyone else, both in terms of the ability to attract and retain talent, as well as the capacity to attract allocators.
Allocators are sticking to a smaller list; it’s easy to give money to a top 50 shop, where there is less career risk. That also dovetails to the prime brokerage space, where they want to deal with a smaller number of clients as well. In general, that sets a good backdrop if you’re in the hedge fund business – the leaders, as long as they generate decent returns, have a tailwind. The counterpoint to that is that it may not necessarily be where the best alpha is; rather, it’s just the best place to be in the market if you’re a hedge fund manager.
For us, that makes it even more attractive, especially if you’re looking at the smaller managers where it’s a little harder for them to attract capital. We continue to believe that the best alphas are in things that are capacity-constrained, a little off the beaten track, and which don’t scale easily without dilution.
Our focus is managers with USD50-300 million that can run USD200 to USD700 million, and they have these interesting alphas that just don’t scale. For us, they’re explicitly doing something different that cannot be scaled. We think pure alpha cannot be easily scaled.
2022 will also be the year where certain crypto strategies enter the mainstream even more, beyond just the beta trades, and become less fringe.
When people are looking forward to expected returns, they are acknowledging that equities and interest rates and credit are not going to hit the bogies they need. For many years in a row, people said hedge funds were boring and betas were doing great. But now, people have realised betas probably aren’t going to cut it – so there’s more enthusiasm for hedge funds than we’ve had in a while, simply because the alternatives don’t deliver the returns investors need.
Manoj Jain, Co-Chief Investment Officer, Maso Capital
When we look at the coming year, areas for us that are particularly interesting will continue to be merger activity. There will be a high amount of M&A in the Asia-Pacific region – in Australia, Japan, Hong Kong, China, Singapore, and even Asia to Europe. Asia to the US I think will be driven more by geopolitics, and particularly US-China relations. It depends on how they develop, but we do know that several situations or companies are looking at US assets. But again, they’re reluctant to move until the political climate eases.
What has surprised us in recent times is the speed of the recovery in confidence. That is reflected in increased merger and acquisition volumes, and in equity capital market volumes. That’s a positive, and that will continue. The next pick-up will be the opening of borders, which will lead to another surge in M&A volumes, because ultimately transactions are still being held up due to the inability to travel, although Zoom is helping.
A lot of what we do is ultimately linked to corporate confidence and investor confidence. There’s significant liquidity around, which is good for board confidence and funding of transactions.
We will see a large number of transactions, and we’re seeing bigger deals happening, which has surprised us positively. Deals are big, and they’re taking place, which is good.
What concerns us is geopolitical news – briefings and movements particularly in or around US-China relations. It can stop transactions from being announced, or when a deal is announced it trades with significant volatility. Now volatility isn’t necessarily bad, but it is something to be aware of.
Other concerns include closing risk, funding rates, and credit markets. As funding costs go up, board confidence on the margin comes down. As the world has started to normalise, and confidence has come back, companies have been rewarded for corporate activity which is good. As the world continues to function in a post-Covid environment, the biggest concern regarding Covid-19 has been the underlying earnings of a company.
Nber Julien Messias, Founder, Head of R&D, Quantology Capital Management
Many market pundits and economists are forecasting that inflation will be the key topic of 2022, so it seems already priced in. But, in addition to this known known, there are still many known unknowns and even more unknown unknowns. Will we get back to a new normal with central banks hiking rates? At which pace? Until which level?
At Quantology Capital, we think that the real alpha-maker is dispersion, and that this new paradigm with less dovish central banks will lead to higher dispersion in the equity markets. Since the upcoming policy of central banks is already disclosed, making money is much more linked to company-related events than to global macro.
If we had to bet on a sector or a topic, we would choose the metaverse. The success of the movie ‘Ready Player One’ by Steven Spielberg (2018 – the initial book by Ernest Cline is even better!) and reduction of each human being to their individual status increases their need for socialisation through gaming and dealing in the metaverse, thanks to augmented or virtual reality.
But beware, as this investment universe is shaky! Robust asset management and risk management techniques are absolutely needed to generate alpha.
In the broad, short future, an even more psychologically-driven equity market will be at the forefront. Today, the new normal for Generation Z is to invest in financial markets through apps on their smart phones. Thus, it enables many newbies to buy and sell stocks, with this new generation being far more sensitive to tech-gurus than to fundamentals – just look at the astonishing share run of Tesla, despite all the warnings from old-school fundamentally-driven stock pickers.
Remember January 2021, when this “wisdom of crowds” sparked huge rallies on junk names, such as Gamestop or AMC, causing some big hedge funds such as Melvin Capital to plunge?
Now, institutional investors must take this new power into account, as it is lethal enough to torpedo your portfolio. In 2020, retail investors did better than experts . It’s time to trust, or at least to be inspired by the crowd.
 Welch, I, (Dec. 2020) The Wisdom of the Robinhood Crowd,
Kevin Kang, Founding Principals, BKCoin Capital
We are likely to see the continuation of institutional adoption in digital assets. Some of the inbound calls we’ve been getting over the last three months have been very exciting in terms of the profiles of the allocators that we’re talking to.
In the past, there were a lot of family office adoptions, and now we’re talking to endowments, foundations, and even insurance companies. The profiles of allocators coming into this space is a lot more traditional now – we’re seeing the continuation of this institutional adoption.
Another big theme next year will be consolidation – a lot of M&As, I expect, and we’re seeing crypto becoming a lot more mainstream.
Carlos Betancourt, Founding Principals, BK Coin Capital
It’s our expectation to start seeing some of the bigger crypto exchanges consolidate. And then, for those names that haven’t had a presence in the US, we expect them to make a push in 2022. Looking forward, from our standpoint as a hedge fund, the conversations have changed, and the calibre of people that we’re talking to has drastically. If you look at the overall crypto market, we expect to see a huge push on the metaverse, and to see a continuous push on NFTs, not just on digital art, but also things like music and collectibles. We think all these areas are slowly starting to be developed by up-and-coming companies across the board.
A ton of money will be continuously poured into NFTs and the metaverse, and you’re seeing it from some of the biggest names in the world. Facebook announcing the name change, Square has announced their name change, and their play is metaverse. You even have beer giants like Budweiser tapping into the space, and we will continue to see this trend through 2022.