As we reflect on 2014 and look forward to 2015, we can also take a longer look-back over the past decade to celebrate the 100th issue of The Hedge Fund Journal. The big picture is that assets shy of $1 trillion in 2004 now surpass $3 trillion. The provenance of these assets has changed as the industry has institutionalized, with more and more money coming from pension funds, endowments, foundations, and insurers while a smaller share is derived from high-net-worth individuals and funds of funds.
Institutionalization has influenced the hedge fund business in manifold ways. Very few hedge funds now value their own portfolios. Most investors like to see independent, rather than related party, fund directors and also insist that other service providers are reputable and experienced. In what was once seen as a secretive industry, the level of portfolio transparency offered to investors has greatly increased. Regulatory oversight of funds, management companies, and individuals has become far more intrusive and onerous, elevating the status of compliance professionals. Indeed, the idea that hedge funds are offshore and lightly regulated seems clearly outdated. Today, a growing proportion of industry assets sits in onshore, regulated vehicles such as UCITS and ’40 Act funds, into which retail investors can place their savings alongside private banks acting for the world’s wealthiest people.
Yet more education is needed to inform the public and politicians about the hedge fund industry, and in this regard we closely follow the efforts of AIMA, which, coincidentally, also recently published the 100th issue of its AIMA Journal. In some areas, such as short selling, it is encouraging to see regulators in China making it possible to short a growing universe of single stocks in recognition of the benefits of short selling.
Elsewhere some misconceptions persist. I am constantly surprised to see hedge funds described as an “asset class” – and then compared to equity indices comprised of long-only exposure to only one asset class. As unconstrained vehicles, hedge funds can trade any and all asset classes, and they can obtain both long and short exposure to them. So, as well as equities, hedge funds are trading government, corporate, and asset-backed debt in hundreds of countries, including emerging markets traded by Finisterre, featured on our cover; hundreds of currencies; hundreds of commodities, and tens of thousands of equity securities, not to mention more exotic instruments such as insurance-linked securities. Hedge funds also trade volatility, and we profile one such fund, Argentière, in this issue. But in any case, comparing hedge funds with any benchmark misses the crucial and over-riding point that absolute returns, and not returns relative to an index, are the guiding star. The consensus is that a return to more volatile markets with greater dispersion will improve the opportunity set for hedge funds in 2015.