Some investors believe hedge funds could enjoy decent returns in 2017 after years of poor performance, but the liquidity constraints and unpredictable returns of the asset class has many institutions wary of placing money with them.
Bryan Goh, Asia chief investment officer at private bank Bordier, and Son Nguyen, chief executive at Swiss fund-of-hedge-funds firm Ayaltis, said they expected hedge funds to do well under Donald Trump's presidency. They were speaking at AsianInvestor's Southeast Asia Institutional Investor Forum (SEAIIF) last month.
“Already Trump has hedge fund support in John Paulson, an indication that the hedge fund [industry] will be better again,” said Nguyen.
Other indications that hedge funds could see their performance markedly improve includes a deepening yield curve as the difference between two- and 10-year Treasury bond yields steepens, and reports that Trump would unwind regulations with a view to reviving investment banks’ proprietary desks, added Nguyen.
Bordier’s Goh (pictured left) argued that hedge funds would be “huge” under Trump as he will be “great for risk assets, for liquidity".
That would mark a big turnaround for the hedge fund industry, which has suffered lacklustre performance for years (see chart below). From January to the end of November this year, the industry returned 3.69% on average, less than half the 7.58% generated by the US benchmark S&P 500, according to Eurekahedge Hedge Fund Index.
This poor performance, when combined with fees of 2% of AUM a year plus 20% of any profits, has led to mass redemptions and fund closures.
While 406 hedge funds started in the first half of 2016, another 530 have closed down, according to Hedge Fund Research. All-told, investors have pulled an estimated $77 billion from the $3.03 trillion hedge fund industry so far this year, according to data provider eVestment.
Nguyen said there was a bright side to this outflow in that the closure of so many poor performers has raised the average calibre of the remaining participants.
Asset owners wary
Yet despite these predictions of stronger performance in 2017, many institutional investors told AsianInvestor they were reluctant to invest in the funds after so many years of underperformance.
It's not just investors in this region that are showing caution, either. A large North American asset owner with a presence in Asia shares the same sentiment.
“We don’t see in hedge funds the predictability, steadiness and stability we find in other alternative investments,” said the chief investment officer of the institution, who declined to be named. “These, plus [high] fees [means] we are staying away more and more from hedge funds."
His institution has a small allocation to hedge funds, and mainly used this as overlay on top of its portfolio. It has around one-third of its total assets under management in alternatives assets, but mainly in private equity, real estate and infrastructure. The CIO said these three investment categories are less sensitive to inflation than hedge funds, and tend to offer less varied annual income flows.
A multi-family office representative is also reticent to place much money with hedge funds, but he principally blamed the lack of liquidity of such investments. He noted that his family office clients preferred the flexibility to draw down money whenever they require it.
Meanwhile, Malaysia's $161 billion Employees' Provident Fund shuns hedge funds because they do not fit its long-term buy-and-hold approach. And two Korean asset owners, the $8 billion Military Mutual Aid Association and the Police Mutual Aid Association, are also reportedly sceptical about hedge funds.
That said, Korea's National Pension Service and Korea Post have made moves this year to build their hedge fund exposure. The former – the country's flagship state retirement institution – in July selected BlackRock and GCM Grosvenor Capital to run a W1.2 trillion hedge fund portfolio, while Korea Post's savings bureau is building a pool of hedge fund managers on which to draw for future mandates.
However, one of the speakers at the SEAIIF forum openly queried whether hedge funds as defined today have a long-term role for the future.
Peter Douglas, principal at CAIA Association, said: "Trump's foreign policy will lead to conflict, and financiers make money from conflict. Longer term, I don't think there will be hedge fund managers. There will be asset management firms offering hedge product, and the hedge fund industry will be an afterthought."
Food for thought, given that Douglas is an expert on hedge funds, having founded GFIA, a hedge fund consulting firm, in Singapore nearly 20 years ago.
Story amended to reflect numbers of hedge funds opening and closing in 2016.