Last year, hedge fund managers raked in impressive returns. They did as well as their equity peers, if not better. According to a Eurekahedge report, global hedge funds were up 11.89% in 2020. The world’s 20 best-performing hedge funds earned $63.5 billion in 2020, a 7% increase compared with 2019’s $59.3 billion, based on LCH Investments data.

Hedge fund strategies that had the most gains were long/short equity, arbitrage and macro. Notably, Asia’s performance was outstanding. The region’s 17.88% gain in 2020 was better than hedge funds based in Europe and the US. Still, the pandemic has also resulted in liquidations. Hedge fund research and data firm PivotalPath found that 79 funds closed in 2020, compared to 66 the year before.

With strategies that require a higher level of leverage and short-term funding, hedge funds can be risky investments. Some market experts believe that it was also hedge funds that caused the 2008 financial crisis because they added excessive risk to the banking and non-banking financing systems.

The hedge fund industry is still largely unregulated. Hedge fund managers can make investments without scrutiny by regulators. Unlike mutual funds, they don’t have to report quarterly holdings, which means no one knows their investments. Regardless of their strategies, hedge funds thrive on volatility and imperfect markets.

Given the encouraging gains in 2020 and markets’ fever for equity assets in Asia and North America, will 2021 be another golden year for hedge funds? Which strategies will be most favoured, and will Asia managers still run first among rivals? AsianInvestor asked experts for their insights.

The following contributions have been edited for clarity and brevity.

Hedge fund performance by strategy (2020 YTD)
Hedge fund performance by strategy (2020 YTD)
Source: Eurekahedge
 

Benjamin Deng, chief investment officer
China Pacific Insurance Company

We don’t have a sizable hedge fund exposure since our regulator has stringent and detailed guidelines and rules. The hedge fund industry in China is still in its early stage compared with the markets in the US and Europe.

Last year, significant alpha returns were generated by long-short strategy fund managers, who had expected equity assets to return to their fundamental values. Before the pandemic, we saw the value of some assets being pushed up artificially, instead of reflecting fair value.

Overall, I believe, this year hedge fund managers will see gains, especially those who focus on global macro strategy, given that the market is expected to provide better conditions, in terms of value.

Adrian Worth, Asia hedge fund research
Mercer

2020 was a banner year for hedge funds. Equity and event-driven strategies were beneficiaries of an acceleration of industry trends and corporate activity that have continued into 2021.

Technology remained a disrupting force across sectors, and the dispersion this created was a boon for equity long-short strategies. A fallout of the first quarter was a significant rise in corporate activity — spanning M&A, stressed/distressed, spin-offs and high equity/debt issuance.

We found that discretionary macro managers reacted well to the volatility spike in the first quarter with macro dispersion matching the micro in 2020. However, quant strategies did not fare so well, struggling as models took time to adjust to the new Covid-19 normal before violent factor rotations and high cross-factor correlations made for a difficult second half of the year. 

Overall, Asian hedge funds outperformed their global peers in 2020. We are excited to see a growing talent pool in the industry in Asia and continued growth in underlying markets, led by mainland China, all of which is attracting interest from overseas. Despite fundraising and due diligence challenges, successes in 2020 give us confidence moving forward.

This year, we have already seen uncertainties around vaccine rollouts, new variants, and economic disruption. We would note the gains of 2020 were partly a function of the flexible mandates that hedge funds enjoy; we expect this to remain a source of strength in 2021.

Alice Lyu, regional director for Hong Kong
Hedge Fund Association

During the pandemic, we saw an increase in new hedge funds, more than previous years, and the trend is expected to continue this year.

Overall, the market has provided a positive environment for hedge fund players, but returns will depend on the strategy and how they react to market volatilities, given that the pandemic is not over. Last year was a positive year for hedge funds players in Asia, especially in Hong Kong and Singapore.

Compared with the US or European hedge funds players, Asia’s asset managers lag in fund size, but the fundraising capabilities are promising.

While we didn’t see any delay in the issuance of new licences for hedge fund players in Hong Kong and Singapore, regulators in these cities do have strict risk management guidelines. Asset managers must ensure that compliance procedures and internal risk management are in line with industry guidelines.

Ryan Korinke, head of hedge fund and quantitative strategies
Pimco

We think it should be a good year for investors to look at hedge funds for their portfolios.

Returns in 2020 were solid; however, the dispersion across managers was pretty significant – about a 15% spread between top quartile and bottom quartile managers, versus 8% to10% in recent years. This reinforces the importance of manager and strategy selection, and while conducting due diligence on a new manager last year was challenging to do virtually, investors and managers are now much more used to and skilled at virtual evaluations.

We have seen most of the price dislocations from last March normalise, leaving few obvious cheap asset classes; however, volatility remains somewhat elevated, which helps trading-oriented strategies.

There is a lot of excitement around vaccine rollouts and returning to normal, but once the pandemic recovery trades have played themselves out, we expect a difficult market environment where manager skill will be valuable, and hedge funds are a great way to harness pure manager skill. Many of the investors we work with are realising this as well, and we expect interest and flows to be robust across the industry in 2021.

Lyn Ngooi, hedge fund solutions investment specialist
JP Morgan Asset Management

Market consensus is increasingly constructive on risk assets. However, while the path out of the Covid-19 pandemic is still being laid, it will be a bumpy ride. In other words, market volatility and price dispersion should continue into 2021.

Hedge funds can generate strong alpha returns in such an environment, as many experienced players already demonstrated across a tumultuous 2020. We believe relative value, macro and long/short equity strategies should continue to perform and see strong inflows. For instance, investors who want to diversify their portfolios but do not want to sacrifice too much upside in the best case scenario may lean toward long/short equity.

The ultra-low-rate environment has made the risk-reward for fixed income going forward quite poor, and some investors may look to low volatility hedge fund strategies to complement traditional fixed income holdings. The opportunity set is indeed attractive, with interesting themes such as sustainability, activism, capital markets trading, technological innovation etcetera.

Manager selection and diversification remain as important as ever - 2020 shows us why, with the gap between the winners and losers widening markedly, especially in the first quarter in 2020.