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Re-calibrating to make most of opportunity

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As hedge fund managers continue to navigate the Covid-19 environment there are several potential issues that could arise as they manage the impact of the pandemic on their business and re-calibrate strategies to take advantage of market opportunities. 

Kevin Huys, Director at of HTC Fiduciary Services Limited, “Harbour”, comments on this development: “We’re seeing the potential for managers to re-evaluate their asset allocation and the focus of their strategies as a result of the Covid-19 pandemic and its impact on markets. Some managers are seeing opportunities in different areas of their strategies, whether that be geographic, sector specific or otherwise, and will look to take advantage.  There may also be funds, such as those with fundamental research heavy strategies that cannot travel, that are facing significant challenges and must determine how best to move forward.”

He explains that reallocations within an existing strategy would not typically require changes in documentation: “Most documents are broadly worded in regards to execution of the strategy, however there are definitive lines which cannot be crossed.  As directors, we must be aware of the investment activities and ensure that they are consistent with the documented strategy and investment guidelines.  You would never tolerate a situation that investors wouldn’t be comfortable with or that shifts the portfolio beyond what has been communicated to investors and what they would anticipate.”

Although it may be difficult for hedge fund managers to anticipate specific moves, it would pay for them to be upfront with investors as their focus shifts. Huys says: “It would be appropriate for managers to communicate with clients that, given the current market conditions, they are adjusting the way they are positioned.”

In his view, the way investors will respond to refocused strategies will depend on their specific situation: “Although investor appetite for hedge funds is increasing in the current environment, it will be up to each investor to take a decision for their specific situation. It depends on their portfolio mix and what they are seeking from each manager.  Managers need to remember that in most cases they are part of an investor’s larger investment portfolio and that the investor has selected them to play a particular role in their overall strategy – and that’s what they need to deliver.”

In regards to the impact of the pandemic more generally, as markets declined in March, Huys was expecting some significant issues around valuation and the potential for large redemptions: “Thankfully the markets recovered quite quickly and those concerns never materialised. It speaks to how robust the industry is.”

However, there may be a few speed-bumps up ahead. Investors are demanding more transparency from managers, largely because they cannot carry out onsite visits. Huys notes: “There are challenges for both existing and new investors as they complete their due diligence requirements. There is more information being shared virtually in the current environment whereas previously managers would have allowed certain information to be viewed in person but not actually released it.”

As has always been the case, managers need to be fair in their dealings with investors, and continue to carefully consider the information each investor is privy to. They should be mindful of any side letter requirements that they have, and when making such commitments they should consider whether they are prepared to give all clients access to such information. “We haven’t encountered specific issues around this yet but as we’re headed into a longer lockdown period with people continuing to work remotely, managers must be deliberate in how and when they share information.” 

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