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US hedge funds industry: stand up, take a bow

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The one enduring quality of the hedge fund industry is its seemingly endless optimism and willingness to continually evolve, to meet the demanding (and sometimes unrealistic) expectations of institutional investors. 

Nowhere is that entrepreneurial spirit more evident than in New York City, the global hub for hedge funds. The latest figures from Preqin show that 71 per cent of new fund launches in Q2 2017 originated out of New York. And there have been some substantial launches: Brandon Haley’s Holocene Advisors LP, for example, went live this April with USD1.5 billion in AUM, while Ben Melkman’s Light Sky Macro also launched with USD1.5 billion. 

Admittedly, there have been high profile fund closures, notable among them Eric Mindich’s Eton Park Capital Management, but as the second generation of hedge fund talent comes to market the wheels keep turning, and the money keeps flowing in; approximately USD25 billion of net inflows for 1H17 according to Preqin, of which Macro strategies have attracted USD13.5 billion. 

And if anyone needed reminding that this industry is as vibrant as ever – despite what mainstream media say – this year’s Hedgeweek USA Awards event, held at the Intercontinental Hotel, was a fizzing affair and, attendance-wise, the biggest yet. It was the perfect encapsulation of the camaraderie that underpins this industry’s success. 

Regardless of the regulatory backdrop, US fund managers and the service providers they rely upon, are more focused than ever on delivering exceptional performance and client support to end investors. 

Speaking with Hedgeweek, Philip Graham, Partner at Harneys – winner of this year’s Best Offshore Law Firm – says that over the last three years, the firm has continued to grow in a multitude of regions, specifically to deliver an enhanced client experience.

“As a prominent offshore law firm, the feedback coming from our global clients has been along the lines of, `We like what you do remotely, but we’d like it even more if you could support us in local time’,” says Graham.

“We’ve certainly found that to be the case in Latin America. “We have an office in Montevideo to service our Uruguayan and Chilean clients, and an office in Sao Paulo to service our Brazilian clients. It’s so important, from a cultural perspective, that our team meets people face-to-face on a regular basis to build trust and confidence in our offering.” 

Ten years ago, Harneys was very much offshore-focused in terms of mindset. Its core office was in the BVI, with satellite offices in London, Hong Kong and Anguilla. But that aspect has changed rapidly and Harneys now has full service offerings throughout not only the BVI office, but also the Cayman Islands, Hong Kong, London and Singapore. Those offices have become an integral part of the firm’s relationship-based global offering. 

“People take confidence when they can look someone in the eye and talk to them. It’s been really exciting to see that evolution,” comments Graham. “Coming out of 2008 through 2011, much of our work was distress-type work, with funds liquidating. We then got to 2012 and decided, `Okay, we need to start planting some acorns again and growing some more oak trees. That’s exactly what we’ve achieved servicing clients in Latin America, Asia, sub-Saharan Africa, etc, helping these clients launch new products.”

As the hedge fund industry continues to grow, so do firms like EisnerAmper LLP – voted Best North American Accounting Firm. In addition to growing its presence in Israel by adding an additional office location and increasing staff, in October 2016 it added a new office location in Dallas as part of an initiative to further develop its presence in the Mid-west.

“Value-add is a key differentiator in our business,” asserts Frank Napolitani, Director, Financial Services at EisnerAmper. “It is a way for EisnerAmper to further build relationships with our clients and become business advisors as opposed to solely, accountants. 

“As a result, we have continued to dedicate resources to curating and executing successful, content-driven events and summits. This year, on 12th June, EisnerAmper hosted its 2nd Annual Alternative Investment Summit at the New York Historical Society and welcomed over 300 fund managers and investors to participate in panel discussions about both the hedge and private equity fund industries.”

One way for hedge fund managers to stand out from the crowd and enhance the investor experience is to continue embracing digital media; both via traditional and social media channels. With more than 8,000 hedge funds flooding the market, managers can’t just rely on performance, they have to be willing and able to articulate their investment edge. They need to catch investors’ attention and get them to turn off the highway. 

Someone that has long been at the forefront of hedge fund PR and communications is New York-based Tom Walek, whose firm Peaks Strategies won Best North American PR Firm. 

Walek refers to what he calls the `evolution of a revolution’ when discussing communications and marketing in today’s hedge fund industry. Hedge funds used to be the most secretive bunch, now they are much more visible, says Walek, citing how SALT has become the biggest hedge fund event on the calendar. 

“Consider how things have changed in the last 20 years. Hedge funds are everywhere today, on Bloomberg, Youtube, the hit show `Billions’, and so on. Leading that, we have evolved as a firm. We’ve pushed that envelope from day one. It used to be, for instance, that we would organise media events, bringing media and managers together for a lunch or panel and that was regarded as something new. You always have to be evolving and at Peaks we are continuing the evolution and the revolution,” explains Walek. 

As managers craft their message, they can’t afford to take their eye off the ball in terms of generating alpha. Again, with so many funds in the marketplace all chasing returns, how one seeks out the next best trading idea, the next best stock, is becoming inexorably more difficult. Managers don’t want to fall into crowded trades as it dilutes their value to investors. 

All of which makes access to research from their prime brokers of paramount importance. One firm that specialises in providing equity research on US small- and mid-cap equities to emerging managers is Wedbush Securities – winner of this year’s award for Best North American Hedge Fund Research Provider.

In particular, Wedbush’s analysts focus on retail and consumer; technology, internet and media; healthcare, and financial institutions. The award-winning Wedbush Best Ideas List, is a dynamic, actively monitored compilation of the highest conviction stock ideas among its team of analysts with respect to outperformance over the forward 6 to 12-month period.

Sean Trager heads up the prime brokerage division within Wedbush Securities. “We provide the same functions that a hedge fund manager would traditionally receive, were they trading a larger volume of assets at a tier one prime,” says Trager, who goes on to explain how the trading landscape for hedge funds has changed in recent years:

“Our core focus is US equities, and we cover an array of strategies and sectors.  Of late, we’ve seen managers achieve tremendous success in the US micro-cap and small-cap spaces. Ironically, it is the names that we rarely saw, and likely turned our noses up at years ago, have become a staple for emerging managers, allowing for impressive returns far beyond that which we’ve seen with the brand name hedge funds. For instance, you wouldn’t likely see a large well known hedge fund trading pinks and bullies, simply because they aren’t nimble enough to allocate to these spaces effectively; whereas emerging managers can very much navigate the space and invest minimal market impact. There are numerous high quality media, healthcare, and  technology stocks that would fall into this category. The dynamics are constantly changing, and we, along with our clients, are changing with them.”

Going forward, Trager confirms that Wedbush aims to replicate the model it operates for seeking out smaller names in equities, in the fixed income space. “We’ve made some strategic hires to build out our fixed income and repo group. We’ve grown the group by 50 per cent over the last 12 months and doubled our AUM,” confirms Trager.

One firm that relies on sourcing its investment ideas from many different avenues, including industry and market news as well as specialised broker research, is BCK Capital Management – winner of Best Event Driven/Merger Arbitrage Fund.

“We’re not concentrated in any one particular market sector,” says Peter Brady, Head of Business Development at BCK. “We’re not sector specialists. At a high level, we are trying to hedge out and eliminate any of the risks where we feel we don’t have a specific advantage or expertise. By its very nature, merger arbitrage tends not to be overly correlated to the market. We can be on either side of deals, long or short. We have no expertise on where the market in general is headed so that’s where we attempt to hedge both market and sector-specific risks.” 

BCK runs a very diversified portfolio, using position limits and loss limits to control risk. Much of what the team does is based on probabilistic thinking for risk/reward. “If a deal is 90% expected to complete and the market is implying that it is only 60% likely to complete, that’s a very good investment for us. That said, even if a deal is 90% likely to complete, 10% of the time the deal won’t complete so you’ve got to run a diversified book. We find that complex situations are more likely to be mispriced and offer attractive risk/reward,” explains Brady.

One might categorise BCK Capital Management as very much discretionary, employing deep level, bottom-up company analysis. At the other end of the spectrum is the systematic fund, which has become a big focus of investment allocations over the last 12 months. 

Fitting this category is NuWave Investment Management, winner of this year’s award for Best Commodities Hedge Fund. NuWave uses pattern recognition in its flagship Combined Futures Portfolio – a multi-strategy approach to trading, which includes allocations to intermediate to long-term trend-based strategies, relative value spread trading strategies and intra-day directional trading strategies.

In contrast with the classical market technician, NuWave’s investment approach does not rely upon any “predetermined patterns” of price behaviour; rather, machine learning and artificial intelligence concepts analogise price action across historical windows in order to assess the probability to which such behaviours portend a consistent directional outcome. 

“While we anticipate our process will see only noise the majority of the time, a smaller percentage of circumstances will yield higher probability outcomes, thereby generating attractive trading opportunities i.e. opportunities where current circumstances, or behaviours, can effectively be related to those in the past,” explains Craig Weynand, Chief Operating Officer at NuWave. 

Like all of this year’s award winners, NuWave demonstrates the passion and ingenuity that underscore precisely why the hedge fund industry needs to continually be championed.

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