This Way Up: How Alternatives Should Look to Reorient in Q4 and Beyond

October 21, 2020

By Estee Kushner

EisnerAmper’s 5th Annual Alternative Investment Summit

EisnerAmper’s 5th Annual Alternative Investment Summit 2020: A Year of Change showcased prominent investors, fund managers and politicians. One virtual panel, titled “This Way Up: How Alternatives Should Look to Reorient in Q4 and Beyond,” addressed how the asset management industry transformed since the global COVID-19 pandemic and anticipated what to expect in Q4 and beyond.

Panelists included:

  • Bradley Saacks, Hedge Fund Reporter, Business Insider (Moderator)
  • Craig Bergstrom, Managing Partner/Chief Investment Officer, Corbin Capital
  • Nancy Davis, Chief Investment Officer, Quadratic Capital Management
  • Terri Lecamp, Partner and Chief Operating Officer, Melody Capital Partners

Here were a few themes discussed:

Winning Strategies and Market Valuations During the Pandemic

Various investment strategies benefited during the market moves of 2020, panelists concurred. Credit strategies, structured credit in particular, which have been lagging behind U.S. equity strategies, have outperformed. In addition, technology investments have fared well due to the shift in e-commerce, demand for collaboration software, cloud computing services and more as people have spent more time at home.

The markets have experienced extreme volatility since the beginning of the pandemic. While some view this as a negative, others view this as a positive. “Volatility can be your friend,” said Davis, who runs an investment advisory firm focused on convexity strategies. “If owned as an asset class for example, interest-rate volatility, it’s a good diversifier and for us, it has resulted in positive performance from Q1-Q3.”

Direct lending and real estate funds have experienced some market volatility as well. Lending strategies underperformed in Q2 but have since recovered. Non-metropolitan real estate markets have performed the best, while the hospitality space has struggled. Some managers have positioned their portfolios properly for market underperformance and have seen positive results as well as recoveries back to pre-COVID-19 levels.

While many hedge fund strategies have underperformed the last few years, the market moves of 2020 have allowed some hedge funds to benefit after recently underperforming. “One of the things we did in response to what was happening was to increase our focus on macro managers trading and less traditional markets,” said Bergstrom, whose firm manages funds of hedge funds and credit portfolios. “One flavor of that was emerging markets. That's generally been good the last five years or so, but generally not so good so far in 2020 where EM has produced a lot more places and ways to lose than ways to make money generally.”

Bergstrom added: “I think when we look year-to-date more generally, at macro, it's not an amazing story, but a more positive one with a lot of the classic macro-manager, some of whose stars have faded a bit in the last few years, have generally performed pretty well. Some others have struggled, but I would say that macro generally, we sort of put in between. It's done better with a better average and a more positive skew than we've seen out of credit managers, in particular, better than structured credit. But generally it has not done as well, or produced as good a skew as equity managers have.”

Data Usage - How to Get Ahead

Data plays a big role in what investment managers do, especially those utilizing quantitative, artificial intelligence (AI), machine learning, or “black box” strategies. Each investment manager consumes and interprets data in an effort to monetize information and research for its investors and outperform the market. 

Successful investment managers will leverage integrative tools -- such as proprietary data warehouses with specialized, real-time inputs, analytics and reporting -- and allow for a seamless flow of information between the front, middle, and back offices.

The Future of Alternative Investments

Investment managers will need to leverage big data and technology to stay ahead of trends, identify market moves and generate alpha.

The past few months of the pandemic have proven to be a great opportunity to think out of the box, and point to non-correlated market sectors and asset classes. The future holds many opportunities for smaller, more niche-type differentiated strategies. Investors need diversified portfolios, more so now with the upcoming U.S. presidential election; whatever the outcome, the market reaction cannot be predicted so it’s best to diversify and be prepared.

Finally, during difficult periods such as 2020, investor communication and transparency is a top priority and funds need to ensure they keep in constant communication with both existing and potential clients.

You can view the discussion here.

About Peter Cogan

Peter Cogan is Managing Partner, Financial Services Industry, the leader of the our Financial Services Audit and Assurance Services Practice leading the Private Equity Group within that practice, a Director of the Cayman Islands office and a member of the firm’s Executive Committee, as well as Chairman of the Board of EisnerAmper Global.