Considering the fact that the people of the world are experiencing the first global pandemic for a century whilst facing the reality of adapting to a more volatile and hostile ecological landscape resulting from the relentless, thoughtless pursuit of profit driven, ecocidal consumerism, that which has been the mainstay of post industrial economies since the end of World War II, new investment opportunities continued to appear after Q1 of 2020 as quickly as the notes printed by the biggest central banks over the course of the last decade.
Markets have slowly but visibly begun to rally, fortified by the additional certainty provided by a settled Brexit agreement between the UK and EU, the inauguration of 46th President of The United States Joseph Biden, and the increasingly rapid international rollout of an ever growing number of efficacious COVID-19 vaccines.
However, while 40 million American citizens filed for unemployment and global billionaires added over half a trillion dollars to their already incredulous and completely unimaginable private wealth, the resilience of the investment industry has been consummately illustrated by the increase in assets under the management of hedge funds, which rose by nearly 15% from $3.1trn at the end of 2019 to $3.6trn over the course of 2020, setting an all time high.
With all of this in mind, there’s never been a better time to understand what drives the success of a hedge fund and its continuing form, understanding that is cemented by having the analytical capabilities to do so in a confident, coherent and conclusive fashion, something for which Alternativesoft’s digital investment platform has built a wide global subscribership around since its inception.
So in 2020, the year of global lockdown that was predicted to be one of the worst ever for the investment industry, HFR metrics noted that hedge fund strategies on average returned 12%. Q4 of 2020 was propped up by the confirmation of a new U.S President and increased financial certainty resulting from the coming Brexit Agreement and confirmation of COVID-19 vaccine rollouts. Investment firms with AUM greater than $5billion attracted $4.8billion of net new capital in that quarter. Equity-focus strategies predictably remained the largest and most popular strategy, finally surpassing $1trillion dollars, with equity hedge fund capital growing by $121billion. A Q4 surge in the total capital invested in event driven hedge funds pushed the yearly increase in strategy assets over 10% to a total of $961billion, making event driven HFs the second largest sector of strategy capital within the hedge fund industry.
In contrast, perhaps an echo of the widening income equality problems that were exacerbated by the pandemic, the same period also helped to “created the widest gulf in performance between top and bottom hedge funds in more than a decade… the gap between the top and bottom deciles widened to 68.9 percentage points, marking the biggest difference in 11 years”.
Furthermore, in their ‘2021 Investment Management Outlook’, Deloitte stated, “Private equity firms seemed to manage risk by offering guidance, network access, or capital to their portfolio companies, while managers of public securities often reviewed counterparty and asset class–specific risks. Valuation of assets for reporting and investment decision support both proved challenging during the early stages of the pandemic. Investment managers of all kinds reassured investors that their portfolios were being managed continuously in the face of adversity.”
The two paragraphs above only serve to heavily emphasise that risk management for hedge funds is an essential element of the investment process for any successful and socially responsible hedge fund, especially those that pursue an active investment strategy. It consists of primarily identifying and evaluating potential risks and, once the risks have been identified and prioritised, a variety of established methods can be utilised to mitigate or reduce the risks until they arrive at a level of risk tolerance as considered by the fund manager. If this is not possible, simply justifying the risks identified for the promised reward of the projected financial return becomes key in making the hedge fund an attractive proposition to investors. Risk and performance are most often identified as two intrinsically linked concepts, their definitions being foundations of modern economic, financial, and investment theory.
Upon outward appearance, hedge funds can seem similar to types of investment fund or even investment portfolios focusing on company shares or bonds. Soberingly, hedge funds often have more complex structures that require additional layers of analysis and understanding to fully grasp the markers of performance and their exposure to market related risk factors. For this reason as well as the fact that, by their very nature, hedge funds have an industry leading appetite for risk and, in most cases, create a very heavy inherent reliance on the fund’s manager, the due diligence that must be performed on hedge funds and their respective managers must be of the most exceptional, comprehensive and unerring character.
The investment strategy and investment goals of each particular hedge fund play a key part in understanding and identifying each respective fund’s associated risks as well as when measuring their absolute or relative performance.
Absolute returns will assist investors looking to compare a hedge fund’s performance to other investment instruments and vehicles, whereas the relative returns of hedge funds are useful in coming to conclusions over a hedge fund’s level of performance in relation to other funds or indexes. With relative returns, the returns are relative to the risk inherent in the investment products under scrutiny.
Risk analysis and performance analysis of investment funds each entail their own specifically selected sets of metrics that, when used properly and in conjunction with all the other relevant statistics, can help to create useful financial models that are effective in illuminating the root causes of a hedge fund’s ongoing success, or in forecasting potential future returns and losses.
Even though hedge funds are in the large part highly speculative, they are versatile investment vehicles often with the ability to take on more risk, usually manifested by protecting themselves or taking advantage of fluctuations in market conditions or market sentiment at short notice. This can be done through implementing short positions or put options, or often by utilising the financial mechanisms of leverage and derivatives. Consequently, many hedge fund managers often take a highly active approach to fund management, corralled by influences not only such as periods of high volatility in financial markets, but also by occurrences like the fact that the amount that managers need to return on top of many a passive investment’s gain just to break even on a net return basis against that passive investment seems to be more consistently on the rise, and at a faster rate than previously seen.
With investors, investments and the market as a whole heavily influenced by the events of 2020, the full shift in all of them is soon to play out over the course of 2021. Alternativesoft’s award winning and continuously updated digital investment platform is equipped with all the quantitative tools and the latest fund manager necessities to assist even the most savvy professional investors and most disruptive investment firms in staying a step ahead of the competition when it comes to analysing and understanding the direction of future trends in investment strategy, investor preference, and the market itself.
N.B. This article does not constitute any professional investment advice or recommendations to buy, sell, or hold any investments or investment products of any kind, and should be treated as more of an illustrative piece for educational purposes.
To trial a truly powerful and comprehensive analytic software for investment decisions, fund allocation, and our new, innovative digital due diligence visit alternativesoft.com , call us on +44 20 7510 2003, or email us information@alternativesoft.com
1 Source, Business Insider, Oct 2020. bit.ly/363t4PX .
2 Source: Hedgeweek, Jan 2021. bit.ly/39SM5pt
3 All statistics in this paragraph were sourced from Hedgeweek, Jan 2021. bit.ly/39SM5pt
4 Source: FT, Dec 2020. on.ft.com/361P6mk
5 Source: Deloitte, Dec 2020. bit.ly/3iAbrfA
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