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Monday, February 24, 2020

Hedge funds adapt to a changing and increasingly institutional era

Date: Thursday, April 25, 2013
Author: Barry Cohen, Hedgefund Intelligence

In 2012, hedge funds continued their long process of recovery that has been underway since the financial markets collapsed a few years ago – with performance improving, with assets growing and with the overall outlook for the industry becoming increasingly stable and optimistic.

But the gains that the hedge fund industry has made of late have been achieved within a far more complex macro, market and operating environment. Among the many challenges that managers must contend with, the slowly improving global economic background has also been punctuated by the ongoing Eurozone crisis, political deadlock in the US and a cautious approach to risk among many investors. As most managers will agree, the halcyon days that marked the earlier years of hedge fund investing are well and truly gone.

Despite all the demanding changes, global assets rose throughout the year, reaching a total of $2.339 trillion (including UCITS funds), which indicates a rise of 8.5% over the start of 2012. However, the figure masks the continuing trend towards bifurcation of the industry. As our Billion Dollar Club analysis reveals, the US continues to dominate the industry, with the multi-billion dollar US firms accounting for 80% of the industry total. Clearly, the impact of institutional investors, who are the driving force behind the increasing consolidation, will play a determining role in the way that the industry develops from here.

As new fund launches also increased last year, younger managers may gain some historical perspective from reading our colourful and irreverent interview with James Rosenwald, a legendary investor/fund manager and one of the most passionate advocates of value investing. Rosenwald describes how he imbibed the concept of value investing from his father and grandfather and tells us why he thinks it’s time to take a close look at a niche mortgage market.

To help gauge where markets are heading and which strategies will succeed or disappoint in 2013, our regular industry outlook survey offers the considered predictions of a panel of veteran investors who are responsible for multi-billion dollar portfolios. The wide range of differing views they express, and their reasons for doing so, should provoke a good deal of strategic thinking.

While the fund of hedge funds sector struggles to maintain the asset levels achieved last year, managers are being forced into a rethink of how best to retain their share of the institutional investor market. With consultants aggressively taking a larger slice of the pie, fund of fund managers are starting to promote themselves as providers of investment solutions – instead of simply offering traditional products – in an effort to retain a role as advisors to investors on hedge fund portfolio allocations.

The tsunami of proposed regulatory changes that are sweeping through all the major jurisdictions remains at the forefront of concerns for all those in the global hedge fund industry – managers, investors and service providers. Although their implementation will make hedge fund operations more expensive and complicated, they could also be a positive force for improving the risk management standards of many firms.

An extensive analysis in this issue by new AIMA chairman and former SEC commissioner Kathleen Casey of key global regulatory changes – such as AIFMD, shadow banking and the Dodd-Frank Act – will help to decipher their many complexities and their impact on the global regulatory landscape.

As always, this edition of the Global Review contains a wealth of performance data and other analysis covering the worldwide hedge fund industry, as well as overviews of the key regions by our teams of editors and researchers. We trust that it will serve as a prime source of information and stimulate some thought on the future direction of the industry.