The right kind of volatility?

The continually-shifting dynamic between hedge fund managers and investors was again thrown into sharp focus this week, after long-running US manager York Capital Management revealed plans to convert its flagship vehicle to an internal-money fund, and close its European hedge fund operations following sustained lukewarm performance.

York’s announcement mirrors moves made by a number of high-profile brand-name firms in recent times: well-established US stars including John Paulson, David Tepper and Louis Bacon have all opted to return external capital and focus on private investments, while London-based Lansdowne Partners’ main Developed Markets Fund switched lanes earlier this year to focus solely on long-only investments, jettisoning its shorting element.

Such upheaval speaks to the often-tempestuous relationship between hedge funds and their clients. Years of decidedly mixed returns, coupled with doggedly high management fees and fierce competition from cheaper alternative products, have steadily eroded manager’s AUMs over the last decade and left investors increasingly scunnered with the industry.

New flow data published by eVestment this week underlines the scale of the challenge. Put simply, allocators continue to pull out more money from hedge funds than they put in – a shortfall of USD55 billion at the last count – and flows are on track to end yet another year in the red.

Compounding the problem, some managers’ positioning seems to have barely budged an inch since they took a hammering in the seismic momentum-to-value rotation a few weeks back. Certain funds appear to be content to bet on “prior winners continuing to win” – a stance that will surely set off more than a few alarm bells among the investor pack.

Still, as it has proven time and again, the hedge fund industry is nothing if not resilient, with a remarkable capacity for reinvention.

Industry performance has generally withstood 2020’s turmoil, and new research suggests the current above-average volatility levels offer an “optimal environment” for hedge funds to take profits from choppy trading and increased dispersion, having lagged the stock market for past few season.

And as the old guard continues to head for the exits, this may unlock a fresh set of opportunities for emerging managers and start-up firms to foster a new spirit of collaboration with investors keen to capitalise on the rapidly-changing market regime.



Hugh Leask
Editor, Hedgeweek
 

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