As William Samuel Johnson, one of the US founding fathers once said: “He knows not his own strength who hath not met adversity.”
Well, it’s fair to say that adversity has been a common trait in the hedge fund industry over the last couple of years as managers have struggled in their alchemical quest to turn base ideas into investment gold.
Performance has lagged broader market indices, trades have become crowded, investors have become more astute and cutthroat in their allocation process, cybersecurity threats have risen exponentially, whilst the weight of regulatory compliance has continued to build.
2016 was, in many ways, the embodiment of uncertainty and adversity (in a broader, global macro sense). According to Eurekahedge, during the first nine months 566 closed versus 518 start-ups.
Fat tail events such as Brexit and the Trump US Presidential victory, threw the established order into chaos. The third quarter of 2016 saw an estimated USD28 billion of hedge fund net outflows – the highest since 2009. Investors, it seems, were getting the jitters, questioning the value of hedge funds which had returned a modest +3.22 per cent, on average, over a 12-month period (based on the HFRI Fund Weighted Composite Index).
This brought year-to-date redemptions to USD51.5 billion. Those suffering significant outflows included high-profile stalwarts of the industry such as Brevan Howard, which saw USD3 billion in redemptions in the first six months of 2016.
But against this backdrop, overall net assets rose 2.5 per cent to USD2.979 trillion through Q3 2016 according to Hedge Fund Research, marking a new high. Despite the trials and tribulations, hedge funds still found a way to thrive. Yes, there have been high-profile fund closures and large losses, but the wider media never champion the winners.
Quantedge Global, a Macro Systematic fund, was up 24.81 per cent on the year through November, Jon Bauer’s USD2.3 billion Contrarian Capital Fund I, a distressed credit fund, was up 21.91 per cent on the year, whilst in the global credit long/short space, the USD1.1 billion Saba Capital Offshore Fund managed by legendary credit trader Boaz Weinstein was up 14 per cent.
It is precisely in these challenging times that those working in the hedge fund/ alternative fund space – managers and service providers alike – who can prove their edge and deliver value are the ones who shine and enhance their reputations.
The 2016 Hedgeweek Editors’ Picks Report aims to do precisely that: to champion those in the industry who are working hard to make a difference, no matter how challenging the market conditions may get. Within this report you will find a selection of articles that range from Toscafund’s appraisal of the Brexit decision for the UK economy, cybersecurity operational due diligence insights by Castle Hall, the evolution of risk management under AIFMD, through to cloud platform evolution, the heralding of Luxembourg’s RAIF regime and why special situation and stock buyback strategies are proving especially effective.
Every client and organisation that Hedgeweek has spoken with over the last 12 months has brought insight and commitment to furthering the growth of the hedge fund industry. We appreciate this and we hope that this compendium provides a snap shot of how the industry continues to thrive in the face of adversity.
I wish everyone who reads this a productive and prosperous 2017.
Managing Editor, Hedgeweek