The June 2015 GAIM Monaco conference covered many themes that have shaped the hedge fund industry over the past decade, both pre and post-crisis. The macro backdrop of equities at a record high with interest rates at a record low led delegates to argue that the need for alternatives is greater than ever, as many fixed-income assets may not even keep pace with inflation and could impose large capital losses on investors if interest rates normalise.
Attendees discussed the relentless rise of liquid alternatives, which are mainly onshore UCITS and ’40 Act funds although some offshore funds can also offer daily or weekly dealing. At the other end of the liquidity spectrum, panels considered the role of hedge funds in longer-term strategies such as direct lending or shipping finance, which can fill the gaps created by bank deleveraging.
As the industry continues to institutionalise, with more inflows coming from pension funds, endowments and foundations, fees and governance are attracting more attention. A wider variety of fee structures are proliferating and some delegates made it clear that they are not prepared to pay performance fees on the beta component of returns. Others said they would insist on private equity style deferral and claw-back clauses for performance fees. Governance continues to become more rigorous as investors demand more thorough oversight from directors, and the CAIA Association in conjunction with the Institute of Banking has developed a Certified Investment Fund Director programme. The hedge fund industry itself has played a role in driving up standards of corporate governance via activist strategies, and the activism panel emphasised how leading activists are turning their attention to European companies. But some activists feel that “constructivist” or “engaged investor” is a more apt term than activist.
Activist hedge fund trades can sometimes be seen in multiple hedge fund portfolios and as quantitative analytics constantly advances, some software packages now allow investors and managers to gauge how over-crowded or contrarian their trades are. This has only become possible due to the level of portfolio transparency that many managers will now offer, which is a far cry from the old image of portfolio positioning being a closely guarded secret.
But amid all this optimism, are newer and smaller hedge funds the cinderellas? At GAIM, I chaired a panel on emerging managers, who continue to face a challenging environment for both launching and raising assets. Yet, there remains a community of allocators who are actively providing seed and acceleration capital – and will sometimes do so even before managers become regulated. The optimists also argue that as uncertainties over AIFMD and other regulations are resolved, the volume of new launches could start to pick up again over the coming years. This would be welcome and heartening to all in the industry.