Trends Watch: Hedge Fund Specialization

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 Craig Bergstrom, Managing Partner and Chief Investment Officer, Corbin Capital Partners.

What is your outlook for alternatives?

Traditional assets, most notably U.S. equities, have obviously had a huge run over the last decade. Private equity is harder to quantify, but any metric shows that the asset class has obviously had a tremendous run as well. By contrast, hedge funds have generated quite disappointing returns. However, going forward, it is hard to envision risk assets achieving similar returns, especially for fixed income. Given that, we believe that hedge funds can again demonstrate the sort of return pattern that justifies their place in institutional portfolios. At the same time, while we are optimistic that hedge funds can do better than they have in the recent past, the strategy still has very real challenges: Most notably, we think there are still too many players running too much money and we think fees are much too high as a percentage of gross returns. As a result, we believe that specialized approaches in an attempt to drive returns -- even if the broader hedge fund universe struggles -- will present the best opportunities.

What is your outlook for the economy?

We wouldn’t be surprised by continued gradual deceleration in the rate of global growth, but we do not expect a recession in 2020. That said, we are not in the business of predicting the path of rates or what will happen in the economy. Given the inherently low success rate in predicting an uncertain future, we do not want to take too much timing risk. Instead, we believe that being fully invested, with diverse exposures and return drivers, is the most viable strategy. We’re cautious of risk reward in many markets, so we believe it’s best to position portfolios defensively to prepare for a turn in markets.   

What keeps you up at night?  

At a micro level, we are worried about increased default rates in leveraged loan markets, and are concerned about the recent large moves in CLOs and the apparent disconnect between leveraged loans/CLOs and high yield bonds. Although leveraged loans have generated a positive result year-to-date, there is more to the story than positive returns would imply. Since July, we have observed more dispersion in price action and credit fundamentals, which has had a negative impact on CLO equity and junior mezzanine bonds. Many market participants have called these moves ‘idiosyncratic,’ but we are hesitant to dismiss them so casually because of the number of loans involved and the speed of the losses. Fundamentals look okay in the very near-term, but with any price action this large, there might be medium-term fundamental risks that the market is now pricing (or mispricing).

At the macro level, we are worried about very long periods of low or negative interest rates.  While it might help our relative returns, we worry about what it could mean for our clients, pensions, endowments, foundations and others that need to generate returns to meet funding requirements