Assuming – which is always risky – that there are no disasters lurking ahead in the remaining weeks of the year, the chances are that 2017 will go down as one of the hedge fund industry’s better years for quite a while.
Performance has been good across most areas – especially in equity-focused strategies – although there have been a couple of notable exceptions in the shape of CTAs, which suffered another downwards lurch in September to reverse their earlier improvement during the summer months, and macro, where performance has also been a struggle for some time.
Asian managers have done particularly well this year, with funds focused on China, India and Japan scoring some spectacular gains – and with our overall AsiaHedge Composite index showing a gain of almost 8% after the first three quarters.
US-based hedge funds are also faring well on the whole, up by over 5% in aggregate to the end of September as measured by the Absolute Return Composite index median return.
European funds have had a strong year in general so far too – with the 4% median return for the EuroHedge Composite index after just nine months of the year outstripping the full-year returns for each of the last three years, and with a marginal 0.03% loss in June being the only negative monthly return for the European hedge fund index since November last year.
Global hedge fund assets are on the rise again, largely as a result of the improved performance but also as a result of renewed investor inflows – with the industry now back at peak assets of just over $3 trillion, according to the latest research by HFM/HFI in the recently published autumn edition of our Global Review.
The flow of new funds is picking up, with some notable and large launches in the US, Asia and Europe in recent months.
And there is a growing sense that the alternative investment industry is starting to move into new and potentially ground-breaking areas that could lead in some very interesting directions – in machine learning and artificial intelligence for instance, or in bitcoin and so-called ‘crypto-currencies’, or in big data and a variety of new quant-based or ‘quantamental’ investing techniques aimed at offering novel solutions for investors.
It is probable, of course, that some of these initiatives may end in tears. That is usually the way. And one has to be a little concerned about the potential implications of the massive boom in factor-based, smart beta, alternative risk premia and ETF-type quant strategies that has been seen over the past few years – most of which have yet to be tested in a market crisis.
But the fact that so much wheel-spin and creativity are taking place can only be a good thing. It demonstrates a renewed spirit of confidence and innovation within the industry. And it points to a continued quest to explore new avenues for growth, diversification and expansion in the years ahead.
There are other areas of potentially significant growth too. Private credit is clearly one, with a report this month by AIMA’s Alternative Credit Council predicting that the market in private credit could reach $1 trillion by 2020 – up from its current estimated level of assets of around $600 billion.
Shareholder activism is another. Barely a day goes by now without news in the mainstream media of a hedge fund-inspired activist campaign involving a publicly quoted company – ranging all the way from renowned US-headquartered activist Third Point’s hefty $3.5 billion investment in Nestle or Elliott’s multiple campaigns around the world down to the rather smaller Zurich-based RBR Capital’s activist break-up plan for Credit Suisse.
Whatever their size, there is mounting evidence that hedge funds are having an increasingly influential say in the way that public companies around the world are managed – and that stakeholders, companies and economies are generally benefitting from the rise in activist investing.
Whether it is done by humans or machines or a mixture of the two, the universe of hedge fund-style investing is clearly expanding – pushing the boundaries into new and exciting areas, and widening the range of opportunities for investors.
So the future looks bright – certainly a whole lot brighter than was the case a year or so ago. Investors know that they need to explore all sorts of new possibilities in an effort to diversify their returns and portfolios as broadly and as imaginatively as possible. And the hedge fund world, as it always has been, will be the laboratory where much of that new experimentation takes place.