Considerations for Alternative Investment Funds During COVID-19: The Road Back and Topics for the Financial Services Industry to Consider in a Post-COVID-19 World
April 28, 2020
As the world moves further into the COVID-19 crisis, general partners (GPs) and limited partners (LPs) of alternative investment firms are facing many aspects of uncertainty. What will the new normal look like? How long until an economic recovery is expected? What will the emotional toll be? Which alternative investment strategies will best position firms to thrive? What will work/life look like post COVID-19? In this blog, EisnerAmper will tackle these questions and explore what the future could hold.
HOW WILL THE DAY-TO-DAY LIFE OF A MANAGER DIFFER AFTER COVID-19?
Professionals working in the alternative investment industry are likely to experience less change on a day-to-day basis versus peers in other industries, primarily because they were early adopters in migrating their technology and data to the cloud.
An increasing number of services have been outsourced and flexible working arrangements are widely in place (with managers able to access data sources such as Bloomberg from any location in the world).
Vincent Calcagno, CEO of Agile Fund Services, believes that this journey actually began almost 20 years ago because of the pressures the financial services industry was put under after 9/11.“In 2001, New York, and Wall Street in particular, was the epicenter of the world’s financial markets,” he said. “A combination of not being able to access the financial district and executives having to rethink most of their business “eggs” all being in a New York basket forced a fundamental change within our industry’s infrastructure relative to other business sectors. As such, the day-to-day activities of a fund manager haven’t been as affected during the disruption caused by the virus.”
WILL THE FINANCIAL SERVICES INDUSTRY RETURN IN MASS TO THE OFFICE?
One gradual change experienced in Western society over the past 20 years is companies slowly adopting a more flexible work from home (WFH) policy.
“A lot of the signals and triggers we expected to see in the next seven-ten years are being accelerated forward and we’re observing their profound impacts along a nearer term time horizon. For example, we can expect perhaps the slow decline of individuals commuting to the office,” said Radha Mistry, foresight practice leader at software corporation Autodesk.
There is debate whether employees being removed from an office environment fosters a potential decline in creativity and innovation.
“You lose the spontaneous and often serendipitous aspect of people running into each other unexpectedly and having a quick five-minute chat that maybe sparks something,” said Mistry. “With online interaction, even with an expanded virtual network, those interactions are still relatively scheduled and curated.”
However, Zack Ellison, founder of A.R.I. Venture Capital in Beverly Hills, said he sees new opportunities in a virtual world, saying that a more flexible working environment will actually “unlock creativity and innovation” as people spend “less time commuting and in unproductive internal meetings, and more time cultivating new and exciting relationships with an ever-expanding virtual network.”
WHAT TYPES OF ALTERNATIVE INVESTMENT MANAGERS WILL WEATHER THE STORM BEST?
In any market cycle, typically, the managers with the most appropriate strategy will outperform. However, COVID-19 has taken the industry into unprecedented waters and LPs will need to reconsider how they select managers. In the post COVID-19 world, an LP will need to add more weight to both a manager’s adaptability and their ability to understand the emotional impact of the virus (see next section on “Emotional Recovery”).
The general industry consensus is the profile of a manager who outperforms in the post COVID-19 world will look very different from that of a manager who created alpha in the pre-COVID-19 world. For many managers in their mid-30s and below, this will be the first full-blown crisis that they have experienced in their careers, which could lead to a shift in more value put on experienced investors.
“Those currently working in the industry with risk management expertise and work experience successfully navigating past crises will be in significantly greater demand,” Ellison said.
Matthew Lee, managing partner, Triaxiom Capital, which is up 7% year-to-date (YTD) through March, added: “The markets will likely remain in a period of heightened volatility with some oscillations before we enter the next bull market. There is perhaps no greater test for funds that purport to be market-neutral than this current environment.”
As managers weigh up the economic consequences of COVID-19, it is important to also understand and consider the emotional impact and how human behavior will be affected. Mistry was living in New Orleans during Hurricane Katrina. The physical damage was immediately obvious but “people didn’t realize the mental health issues until the following months and even years,” she recalls.
This emotional impact will hinder the return to normality when cities, states and countries do reopen. Transport hubs and businesses (restaurants, shops, cinemas, etc.) will have to win back their customers trust by demonstrating both a significantly higher standard of cleaning and proving that they can provide a controlled, safe, clean environment for their clientele. This will be especially true for other places like golf courses, bars, and lounges, which historically have been attractions for fund managers to entertain clients and prospects.
Martina Bozadzhieva, head of research at management consulting firm DuckerFrontier, believes that businesses will see a surge in resources devoted to cleaning. “There will be some automation with robots, but most will be human and we will see an increase in cleaning labor needs,” she said. “Some of these cleaning jobs will be temporary until we have a vaccine, but some will stick and become normal.”
In terms of a manager’s day-to-day responsibilities, a prolonged drop in business travel is expected. “We have now seen that it is not absolutely necessary as current technology can replace much of it,” Lee said. “For client contact stuff I tend to think it will not be as impacted. We are still social creatures after all and the substitution of being in-person together with sharing something like a meal or entertainment cannot be replaced by current technology. It will be a sad day when it is.”
WHAT WILL THE ECONOMIC RECOVERY LOOK LIKE?
Initially, it seemed as though a ‘V’ shaped recovery was possible. As the economic impact has become more obvious, it now appears that a longer ‘U’ shaped recovery is more likely. “I’m not sure why more people aren’t asking about the third option,” Calcagno said. “Could we be headed straight back into another rapid dip resulting in a ‘W’ shaped recovery pattern?”
In terms of timing of the recovery, a full recovery cannot begin until there is a vaccine or proven treatment to fight the virus and current predictions on this suggest it is approximately 12-18 months out. “I’m not sure everyone recognizes the fact that the U.S. government is the largest credit portfolio manager in the world,” Calcagno added. “Does anyone really want to be up on the other side of that trading partner?”
As the above thoughts and ideas suggest, LPs and GPs will face a number of new challenges in the post-COVID-19 world. Many industries will operate in new and unthinkable ways and for managers to generate alpha, they will have to revolutionize their approach to the markets. Ultimately, there will be plenty of opportunities in the new world for the manager who can adapt and execute quickly.