Trends Watch: The Fluidity of Hedge Funds

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Jeff Schachter, President and Chief Operating Officer, Crawford Lake Capital Management, LLC.

What is your outlook for hedge funds?

Investors need their money to be managed and are likely to want allocations to strategies with varying risk/return profiles and volatility levels. As a result, I believe there will always be demand for alternative investments. Each alternative investment, whether hedge fund, private equity, venture capital or real estate, has its own unique features, and will therefore play a different role in any portfolio.

This is a fluid industry that continually sees over 500 new hedge fund launches each year. At the same time, a similar number of funds close down each year for various reasons, including weak performance, fundraising challenges, and decisions by the founders to retire or convert into a family office. Although the barriers to entry for hedge funds have historically been fairly low, they have risen as the industry has become more heavily regulated and institutionalized. However, this industry continues to attract the entry of new talent with smart ideas and the skills to implement investment approaches and strategies that will generate alpha. As a result, I expect the hedge fund industry to continue growing, though there will be ongoing pressure to perform in a manner that justifies their fees, and to meet institutional investor expectations.

Where do you see the biggest opportunities?

We don’t presume to predict where the markets are headed, and look only for opportunities where we see the right setup in a stock. However, we do anticipate increased volatility, whether driven by the U.S. election, the overextension of the recent economic expansion and bull market, or other global factors.  

What are the greatest challenges you face?

We see competition from the growth in quantitative strategies and low-cost index products. However, we believe these trends will likely drive increased volatility, and therefore present potential opportunities.  

What is your outlook for the economy?

After the 2008 global financial crisis, interest rates were lowered to historical levels and we went to a zero interest rate environment. We believe we are going to be in this low interest rate environment for a long time, which is no longer the new norm, it is the norm. The current economy is fairly strong, unemployment is low, there is wage growth and it is a good time to be an employee looking for a job. However, the flip side is that this makes it more difficult to be an employer looking to hire.

Globally, the U.S.-China trade war created some headwinds, but that seems to be slowly resolving. There has also been some heightened geopolitical risk to which the markets have barely reacted. Overall, it seems to be a fairly positive economic environment, with recent headwinds on the wane.

What keeps you up at night?

Having lived through the turmoil of the 2008 financial crisis, during which I didn’t sleep for long periods of time, nothing really keeps me up at night anymore. However, I am never complacent, and remain passionate about providing the best possible experience to investors. Keeping that on the forefront of my mind means I never really rest.