Don’t Call it a Comeback​

It’s not a comeback because hedge funds are simply doing their job – providing investors with downside protection, diversification and alpha during a period of market volatility.

Although equity indices such as the S&P 500 are solidly up for the year, that masks the rollercoaster ride stocks have actually been on. The ‘tariffs tantrum’ caused deep concern among investors about the impact of the US fighting trade wars with its main trading partners.

Indeed, in the aftermath of ‘Liberation Day’ when tariffs were announced, the S&P 500 fell 10% before later rallying by about the same amount when a pause on tariffs was announced.

This kind of volatility makes large, long-term pools of capital very nervous. These pension funds, university endowments and insurance companies typically have large parts of their portfolios in equities and these kinds of gyrations can cause havoc for them.

They respond by diversifying, moving into other asset classes and increasing their allocations to strategies which provide sources of alpha and downside protection.

Enter hedge funds, stage left. The classic logic of the original ‘hedged fund’ equity long/short strategy was to protect allocators during downturns while also delivering outperformance on the upside.

In recent decades the industry has evolved into an extraordinarily diverse array of heterogenous strategies and it would be wrong to make broad generalisations about hedge fund performance.

And hedge fund strategies are now at the core of the portfolios of many large, sophisticated investors. The industry has become institutionalised and globalised and its value is clearly established.

But it is undoubtedly the case that many allocators consider that the industry does deliver particular value when times are difficult and these latest numbers demonstrate that.

With the money coming in again it may be worth managers considering the importance of educating prospective investors around the world about what they do via thoughtful, careful coverage in the global financial media.

This can help managers by putting them on the radar of target investors, generating reverse enquiries and dialogue and supporting due diligence. 

This kind of programme focusing on investor audiences is already undertaken by a large majority of larger managers and increasingly by many smaller managers.

It is not a replacement for traditional capital raising but it can act like leverage and make it more effective. Please get in contact if you are interested in learning more!

– Christen Thomson, Senior Counsel and global hedge fund lead, CDR (Citigate Dewe Rogerson).