PivotalPath is passionate about providing accurate hedge fund information and performance analysis tools. CEO Jon Caplis talks to Hedgeweek about current challenges and opportunities and how the firm helps allocators better source, evaluate and monitor hedge fund investments.
HW: PivotalPath is a hedge fund research business working with allocators, how are current economic conditions affecting how you and your clients see the hedge fund space?
JC: For us, 2023 has been about telling the story of how economic and policy tailwinds have impacted hedge fund strategies. This year we’ve completed client research on inflation, interest rates and volatility, and will continue to look at other key themes.
Our findings have been fascinating. We’ve found – counter to some expectations – that high rates are generally good for hedge funds. Since 2000, the risk-free rate has coincided with big differences in performance, which historically favours many hedge fund strategies relative to the S&P 500 Index.
The PivotalPath’s Hedge Fund Composite Index not only generated 650bps more during periods of high rates, but also increased its excess return above the risk-free rate from 7.3% to 10%, an improvement of 270bps.
HW: How does this play into your forecasts for the coming months?
JC: We are always evidence based. We have a deep well of historical data that gives us a nuanced picture across all conditions and strategies – it’s this resource that helps clients.
Interest rates may be elevated for some time, so many hedge fund strategies should continue to do well. But if we look at other indicators, like the Volatility Index (VIX), funds historically do better when the VIX is above 20, versus below 20. Right now, we are in a low vol, high risk-free rate and high inflation environment, which does send conflicting signals.
However, the PivotalPath Volatility Index, which includes primarily tail risk strategies, has historically thrived in higher rate environments, returning 22% per annum when rates were above 3% vs. 6.6% when below 3%, along with increased excess returns of almost 12% per annum.
HW: With market uncertainty and your wealth of data, can you outline the most impactful drivers of allocator demand in the coming year?
JC: The bar is higher for performance and allocators will inevitably be pickier with the strategies they invest in. In the current economy, priorities will focus on finding excess returns beyond the risk-free rate, rather than just the search for uncorrelated returns and alpha that has characterised the last decade.
Expectations are higher, but there is also a positive halo effect hovering over hedge funds and a better appreciation for diversifying strategies, like macro, managed futures, volatility and multi-strat.
We work with a wide array of allocators and not all their criteria are the same. If you’re just looking forward, your focus will be on higher returns. On the other hand, given the volatility of 2022, many will continue to appreciate the downside protection from funds. In most cases, clients will be searching for both – the excess returns and protection that a well-balanced hedge fund portfolio can provide.
HW: What have been the biggest drivers of growth within your business?
JC: Our substance drives the business. PivotalPath believes that great hedge fund research is not about manager league tables. There is now a greater appreciation for comprehensive data, accurate benchmarks and the functionality and tools to be able to differentiate and select managers. Ultimately, using PivotalPath will help allocators better source, evaluate, and monitor hedge fund investments – it’s a big reason why we have won this award.
Jon Caplis is the CEO of PivotalPath, an insights and analytics provider to a diverse set of institutional investors, with over $300bn in combined hedge fund investments.