Trends Watch: Niche Strategies

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 Abby Flamholz, Managing Member, Worth Venture Partners.

What is your outlook for hedge funds? 

I think of hedge funds as low beta alternative investments that focus on niche alternative investment strategies. This is the first year in a while where traditional hedge fund factors like volatility and dispersion were positive. I think this can be the first of many years where these factors can contribute meaningfully to performance, which bodes well for strategies that do not have beta.

What areas present the greatest opportunities and why?  

We are seeing the best opportunities in smaller, nichier, less crowded strategies. But I would like to define this a bit more. We see opportunity in complicated situations which many allocators will not take the time to understand, and often these investment strategies have an operating business component which keeps out the purely financial investors. We like to see the manager having a structural edge relative to the countless other managers out there. The risk of doing crowded or popular trades is that while, on the surface, they may appear to not have stock market or interest rate risk, they tend to have hedge fund beta risk – meaning there is a risk of multiple other investors unwinding en masse. We want to avoid the risk of crowded trades. We are targeting strategies making absolute returns that have idiosyncratic risks opposed to market risk.  For us, that includes getting to managers early. Another way is looking at investment strategies on a granular basis. For example, as opposed to just saying the historical returns are X on the whole portfolio, we may say we really like this niche aspect of the strategy and we will craft a specific investment vehicle for our clients in that specific part of the investment strategy which may be nichier or more complex. The days of giving money to smart and historically successful managers and assuming that “past performance will be indicative of future results” are over. The markets are simply too competitive with zero interest rates and the flood of capital having masked a lot of investment risk.

What are the biggest challenges you face?  

My biggest challenge, when investing actively in low beta alternatives, has been the rising equity market. There hasn’t been a compelling reason to diversify from equities for many years. Second to that is finding compelling risk-adjusted returns when there is such a surplus of capital crowding trades and creating either lower returns or higher risk.

What keeps you up at night?

Existential threats and black swan events are always a fear when investing. I know that what I cannot predict is the thing that I should be nervous about.