EisnerAmper: Alternative Investment Summit

State of the Hedge Fund Industry: A Discussion of the Past, Present, and Future

Just 20 years ago, the hedge fund industry was considered to be a cottage industry mainly focused on utilizing a fundamental trading approach. Over the years, the industry has experienced ebbs and flows with the market as well in supply and demand of investors. It took a long time for the demand by institutionalized investors to grow, but now that demand is beginning to wane as the S&P 500 index has increased almost 200% since its low 9 years ago compared to the hedge fund industry which has increased about 50% during that time.

Strategy du Jour

At our second annual Alternative Investment Summit in New York, panelists discussed the pros and cons of the top strategy today: quantitative hedge funds. Today, the most sought-out hedge fund strategy is quantitative, with traditional fundamentally driven managers also trying to utilize quantitative analysis within their investment programs.  However, panelists concurred that while quantitative analysis is important, investing is about judgment and at the end of the day the computer has the data, but it cannot make the assessment. Some issues may arise in a quant fund, such as that the data teams and investment teams do not always speak the same language and it often takes time to work out the kinks.  Additionally, there is often confirmation bias in data as an analyst may look for 3 good reasons why the data supports their viewpoint as opposed to looking at the bigger picture. Also, one needs to look at the quality of the data as there can be several years of data obtained and not all of it may be relevant. The overall perception from the panelists is that human judgement will always be needed and at this point in time it is hard to imagine one working without the other.

Cybersecurity and More

Managers today are spending more time and money on cybersecurity as well as looking for cheaper, more efficient systems to put in place given the fee compression in the industry.  The panelists all agreed that having good partners for IT services, accounting, legal, etc. will aid in setting up strong continuity plans and segregating the manager’s risks.  As fees compress, there is an incentive for the large firms to be efficient with costs, though it can be challenging and time consuming for them to upgrade data and other systems they have used for years to newer, faster systems.  Emerging managers are able to compete now more than ever as they have access to low cost services by utilizing cloud services and newer, more advanced operating systems. They can also attract larger investors by offering separate platforms such as managed accounts, UCITs, and 1940 act mutual funds.  These product structures allow new managers a great way to diversify their asset base and allow for new investors, such as institutional investors, to enter their platform.

Outlook for the Hedge Fund Industry

Looking forward, the panelists are all optimistic for the next couple of years. There is currently less correlation in the market than the past few years as the markets are generally trading independently of each other. This allows for a much more competitive landscape which is promising for the industry, especially long/short funds -- the Russell 2000 index started increasing well before the U.S. presidential election in November 2016 and is expected to continue as the Trump growth agenda comes to fruition.  However, panelists cautioned managers to limit changing their portfolio based on politics as volatility in the market has remained low and politics can often be a lot of “theatre.”  All in all, it looks as though we are nearing the time again when hedge fund managers can outperform the market.

EisnerAmper would like to thank the panelists for their time and insights:

• Michael Hurley, Highland Capital Management
• Robert Kaplan, EnTrustPermal
• Scott Merkel, Lyxor Asset Management
• John M. Williamson, EisnerAmper (moderator)