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Hedge Funds
The hedge fund industry realized its highest gains of the decade, with an average return of more than 9%. Figure 1 shows the distribution of our hedge fund strategies, of which more than half of the strategies exceed a return of 10%. As the strategies performed differently across strategies in Q4 2019, it is interesting to have a look at Figure 2, in which is shown, how the different strategies performed compared to their benchmarks. The redemption trend continues but the amount redeemed continuously declined. However, investments in the industry also declines. Overall more redemptions than investments were offset by an organic growth of around 9%, resulting more or less at the same AUM as at the end of 2018. For 2020, we assume, that these trends continue. Investors may expect lower returns than previously, as the industry was unable to meet expectations in most years of the decade. Now, as equity markets are at record highs, it is unlikely that it continues raising at similar pace. As a consequence, we assume that there is a shift in strategies within the industry. This is further supported by the increased interest of Investors in ESG, which is rarely incorporated in the industry. Pensions funds are likely being more interest in hedge funds, as interest rates remain at a very low level. |
Along with the shift in strategies, the pressure on the industry is tense, as the standard 2-20 fees are lowered more and more. We do see a tendency in the market with the highest quality managers with constant outperformance to be able to charge higher fees than 2-20 and attracting most of the capital inflows into the industry. Furthermore, there are so many funds, whereas only few manage the main stake of the AUM of the industry, implicating a consolidation trend And focus on developed manager outperform the benchmarks. With the good results in private markets, it is likely that cash is moved towards the private equity and debt industry, as the profit expectations of the hedge fund industry is likely to decline.
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Figure 1: Distribution of Performance of Stone Mountain Capital (SMC) Hedge Fund Strategies in 4Q2019, Source: Stone Mountain Capital Research
Figure 2: 2019 Hedge Fund Performance of Stone Mountain Capital (SMC) Strategies compared with Benchmarks, Source: Stone Mountain Capital Research
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