Hedge funds have had a ‘stressful’ 2022 suffering underperformance against the S&P500 and enduring billions of dollars in outflows.
Research from Nasdaq’s eVestment reveals investors withdrew a colossal USD20.75 billion from hedge funds this September. Meanwhile poor performance also accounted for a reduction in overall asset levels. The result was a USD75.38 billion decline in assets to an estimated USD3.423 trillion.
Preqin’s hedge fund quarterly update for Q2 this year painted a similarly bleak picture with negative returns across all major markets seeing investors pull USD32 billion from the alternative investment strategies; which at the time markets the largest exodus since Covid-19 hit two years ago.
Yet Patrick Ghali, co-founder of hedge fund advisory firm Sussex Partners, warns against viewing all strategies in the same light, arguing that while some hedge funds undoubtedly suffered – equity long/short for example – others thrived.
“People always look at equity long/short because, by assets, it’s the largest part of the industry, and the strategy hasn’t had a great year. But there is a huge dispersion in performance across the hedge fund universe. Macro for example has had a great year.”
Ghali’s comments are evidenced by eVestment’s research which found four of the five macro hedge funds that attracted the largest asset inflows in September “performed exceptionally well” in 2022, producing an average return near 20 per cent.
“Manager selection is just as important as strategy selection” Ghali says. “Certain managers have enjoyed a really good year. The issue is people always look at hedge funds and throw everything in one bucket, but it’s a wide sector. If you pick the right strategies and the right managers, performance can be incredibly strong.”
Looking to next year, Ghali says market volatility will remain an issue.
“We are going to continue to focus on diversifying our pure alpha strategy because in our view it is too early to invest in managers with a high net equity exposure. We think the markets will continue to be choppy and we are surprised that we haven’t seen more volatility in equity markets this year. So, for us, it’s going to continue to be a focus on systematic global macro or relative value managers,” he says.
Ghali says there will also be interest in Asia where there is an opportunity for managers to “take advantage of specific arbitrage opportunities”.
He adds that while it is not yet ready to invest, Sussex Partners is starting to look at equity and credit managers.
“More so to get our ducks in a row than to allocate at the moment,” he says.
Ghali says there is also strong demand for multi-manager platforms but adds that while these are often seen as a replacement for fund-of-fund offerings, the latter is also enjoying a resurgence.
“Surprisingly we are starting to see interest return to fund-of-funds. After all it is just a portfolio and for a lot of investors that makes more sense than using one manager. It’s also much easier to have one line item in your portfolio than having to onboard 10 or 20 positions.”