As shifting monetary policy and stagnant growth will continue to underscore the landscape for the foreseeable future, managers that succeed in generating alpha and weather the storm will post positive returns for their clients. This begs the question—how do managers brave the headwinds and emerge victorious in these challenging conditions?
In this high-stakes environment, trends in the hedge fund space are indicating that agility, strategic positioning, and, perhaps most importantly, diversification will set the framework for success and allow hedge fund players to distinguish themselves and deliver on client expectations.
From an operational lens, digital transformation - with a focused AI and generative AI component - will continue to take precedence. The ability to deliver instant and accurate market intelligence, financial research and data analytics is an unparalleled advantage from a competitive standpoint and it optimises productivity for more strategic pursuits. A tech stack complete with artificial intelligence, generative AI, machine learning and predictive analytics will become table stakes for hedge funds to stay competitive and enhance their trading, risk and operational functions.
Fee structure remains a hot topic, with hedge fund managers continuing to overhaul traditional tiered structures to remain competitive. Utilising tactics such as commitment clauses, additional share classes, allocation-based tier structures and performance crystallisation time frames, customisation is the name of the game in order to differentiate offerings.
From a portfolio allocation lens, diversified alpha sources in the form of multi-manager platforms (multi-PMs) are turning heads. A document sourced from the AlphaSense platform indicates that over the last six years, multi-manager funds have grown their assets by about 170 per cent, with the remainder of the industry only growing 14 per cent. During periods of ongoing market volatility, the ability to pivot and re-position strategically will serve as a key differentiator and revenue generator.
The focus on ESG portfolio integration serves as a high-potential alpha generator in hedge fund portfolios as well. According to recent UBS analyst research sourced from the AlphaSense platform, hedge funds are ramping up their ESG initiatives, deploying sustainable investment through equity long/short and credit strategies. With the potential for lower interest rates in 2024, it is expected that sustainable assets will gain further momentum within the industry.
Similarly, the consistent performance of liquid alternatives seems to offer a safe haven and diversification against interest rate volatility and underperforming equities. According to research from Goldman Sachs, diversified liquid alternatives have historically outperformed US large-cap equities by 13-47 per cent during periods when the S&P 500 fell 15 per cent or more.
With a “new normal” of ongoing market volatility and fluctuating macroeconomic conditions, the prevailing trends and themes shaping the industry offer hedge fund managers opportunities for distinction in a challenging landscape. From an operational perspective, AI-focused digital transformation and competitive fee structuring serve as differentiators. From an asset allocation perspective, trends around multi-PM management, ESG integration and liquid alternatives offer methods that are more risk-averse and diversified for portfolio rebalancing.
