Hedge funds: the 2017 outlook

Hedge funds faced hard times in 2016. InvestmentEurope has canvassed views of Geneva and London-based hedge fund buyers on their outlook for 2017.

Hedge fund data providers HFR and eVestment reported investors have removed between $70.1bn (€65.7bn) and $106bn (€99.1bn) from hedge funds for the full year 2016, forming the largest annual outflow since 2009.

Hedge funds’ total assets stood up at $3.02trn (€2.83trn) to $3.04trn (€2.84trn).

“2016 has been one of the worst years for the hedge fund industry. Every four to five years one should expect a bad year. We have been resilient with our fund selection despite a number of managers having underperformed, especially in the last quarter of 2016,” notes Caron Bastianpillai, portfolio manager long/short equity strategies mat Notz Stucki, adding that the month of November 2016 “could have either made your year or destroyed it.”

That said, he also highlights event driven strategies doing particularly well in 2016, breaking records in terms of deals, and that this trend may last through 2017.

“The current environment could not be better for these funds. Companies have a lot of cash, M&A activity is strong, potential interest rates hikes will precipitate more deals,” Bastianpillai says.

ROBUSTNESS
eVestment data suggests, however, that event driven strategies shed more through redemptions than any other part of the universe in the last couple of years despite producing some of the industry’s best returns in 2016.

In contrast, the biggest asset gainers of the year were managed futures products, “even though they produced the worst average returns of any major strategy,” says eVestment.

Cédric Vuignier, head of Manager Research and Alternative Investments at Syz Asset Management, says the firm’s hedge fund selection exhibited robustness despite the tough market environment in Q4 2016.

A focus for him in 2017 will be Asia-based hedge funds, suggesting that inefficiencies in the Asian markets provide more opportunities than in other areas.

Bastianpillai has stressed a number of changes ongoing within the hedge fund industry. “The largest hedge fund managers like Renaissance and Bridgewater have become ever larger.

Hedge fund managers appear to be more short-term in their investment horizon following price moves, which is what drove the market last year – as opposed to fundamentals,” Notz Stucki’s fund buyer said.

Like Vuignier at Syz AM, he notes that US hedge funds are increasingly launching Ucits versions of their offshore hedge funds in Europe as their AUM falls in the US.

Vuignier adds these funds are only replicable to 90% in order to comply with Ucits IV regulation. Despite outflows, demand is still here.

Syz AM is set to focus all its fund searches on alternatives. A number of firms have stopped hedge fund investments in Switzerland but Swiss advisory firms and institutional clients are looking for hedge funds and alternative products, Vuignier stresses.

Another Geneva-based selector spots that European institutional investors have started to raise their hedge fund allocation again whereas US peers are trimming.

DIVERSIFICATION
Giving her 2017 outlook, Lisa Fridman, global head of Research at Paamco, estimates that with uncertainty around Brexit negotiations and upcoming elections in Europe, volatility may increase
in the coming months.

“We believe diversification across strategies and return drivers is important.  We see opportunities in trading oriented strategies and approaches which maintain flexibility to deploy capital on dislocations.

“With respect to fundamentally driven strategies, we believe 2017 should present opportunities for active investment managers to deliver alpha through long and short security selection while limiting directional exposure,” she says.

Ken Heinz, president of data provider Hedge Fund Research, expects strong performances from macro and specifically macro discretionary thematic strategies in 2017 “with both Brexit and US elections behind us, US equities having rallied to record highs, remaining valuation upside in euro and Asian equities, higher US rates and now realistic expectations for US inflation pressures to develop.”

“Markets are in the process of reverting to more normalised, fundamental functioning, as opposed to expecting and reacting to macro shocks and fears and expectations for stimulus; this should drive performance across macro,” Heinz foresees.

This article was first published in the January 2017 issue of InvestmentEurope.

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