Top Hedge Fund Industry Trends For 2018

Written by Don Steinbrugge

Each year, Agecroft Partners predicts the top hedge fund industry trends stemming from our contact with more than two thousand institutional investors and hundreds of hedge fund organizations. The hedge fund industry is dynamic, and participants are best served by anticipating, rather than reacting to, change. Below are Agecroft’s 9^th annual predictions for the biggest trends in the hedge fund industry for 2018.

Top Hedge Fund Industry Trends for 2018

Hedge fund industry assets to reach an all-time high in 2018 for the 10th year in a row

Despite the plethora of negative articles about the hedge fund industry, hedge fund assets have reached an all-time high 5 quarters in a row. There is clearly a disconnect between the mainstream media’s coverage of the industry and the reasons why investors continue to allocate to hedge funds. Across the hedge fund investor landscape, we see a significant improvement in sentiment towards the industry. We forecast that industry assets will grow by 5.5% over the next 12 months.

Large rotation of assets based on changes in strategy preferences and relative performance of individual managers

While the past few years have been challenging for the performance of hedge fund indices, we have seen large dispersions of performance across strategies and among managers with similar styles. Some strategies and individual managers have performed quite well.Underperforming managers will experience above average withdrawals as investors grow increasingly impatient with disappointing performance from high priced investment structures. Some of these assets will be reinvested with better performing managers in the same strategy. Most will flow into other strategies as investors re-position their portfolios based on where they think active managers have more opportunity to add value.

Strategies that will lose assets include:

Traditional long/short equity focusing on the developed markets. A large percent of managers have delivered negative alpha over the past 5 years. Investors have become overwhelmingly disappointed in, and will continue to withdraw from managers who consistently fail to deliver on their value proposition

High beta fixed income managers. Many investors believe that these managers face strong headwinds with rising interest rates and widening spreads.

Strategies that will gain assets include:

Quant – These strategies comprise multiple categories and have been responsible for a disproportional share of industry growth. Currently, 7 of the 11 largest hedge fund firms are quantitative mangers.

Asia long/short equity – The IMF predicts that 2/3 of world growth will come from Asia over the next 5 years. Less than 5% of Hedge Fund industry assets are invested with Asia based managers. Today, Asian markets typically offer lower P/E multiples, higher volatility and less institutional ownership, all of which should benefit active management.

Reinsurance – There has been a significant recent increase in demand due to expected 2018 price increases driven by the major hurricanes, earthquakes, and wildfires in the 3^rdand 4^th quarters of 2017.

Higher turnover fixed income – Strategies that provide liquidity to complex/less liquid fixed income securities have replaced bank proprietary trading desks. Skilled managers generate most of their return through alpha and actively hedge market risk.

Strategies that blur the lines between private equity and hedge funds – Most of these are private lending/specialty financing. While there is growing concern about how some will perform in a market downturn, they offer an attractive alternative to traditional fixed income.