With the end of the year a few days away, Hedge Funds Club’s Stefan Nilsson sums up where the hedge fund industry is at.
The hedge fund industry in 2022
2022 has been a mixed bag. The hedge fund industry as a whole has outperformed but most funds have still been losing money, just not as much as the stock market. The winners this year have mainly been the big fund houses. According to data from Pensions & Investments, an estimated 70% of the world’s ca 15,000 hedge funds are headquartered in the US. Bridgewater Associates, with an AUM of US$126.4 billion, remains the world’s biggest hedge fund manager and all of the 20 biggest hedge funds are based in either the US or the UK. The industry’s total AUM is estimated at around US$4.5 trillion. Here in Asia, hedge funds on average have underperformed their western/global cousins. The Eurekahedge Asian Hedge Fund Index had returned -8.71% as of the end of November, compared to -3.63% for all hedge funds. On a strategy level, global macro (+11.5%) and managed futures (+14.4%) have done well (according to the PivotalPath Hedge Indices as of the end of November). A healthy number of new hedge fund launches were seen in early 2022, but the pace slowed down significantly later in the year.
The capital raising environment has been challenging for many Asian hedge funds, partly because of the negative performance numbers but also because of pandemic-related travel and meeting restrictions. It is hard to get tickets without meeting face-to-face with the allocator. But I think we will see a more favourable environment in 2023. Not all, but many restrictions have been lifted and thus we should see more investor roadshows and events.
The crypto ice age may mean that some of those investors will come back to the more old-school hedge fund space. The so-called crypto hedge funds will find it hard to survive. A trend in 2023 will no doubt be improved due diligence and governance for all kinds of investments. The smoke-and-mirrors shows in the crypto space where major finance houses have been caught with their pants down have woken up investors. The crypto space is not different, it is not revolutionary. Business is still business and one needs to look at risks in a sober and realistic way.
The hedge fund industry, by and large, learned that lesson following the Madoff scam in 2008. Some hedge funds have made short-term gains by placing crypto bets (not least from shorts, taking the opposite side of the trades that “crypto believers” put on). Some of that may continue in the short term, but probably to a lesser extent. But even smart traders with proper risk awareness will find it hard to stomach the crypto industry’s lack of governance and non-existent risk management. Those short-term bets are truly bets, not investments, and they are highly risky as the infrastructure is not there. When exchanges, custodians and other counterparties can’t be fully trusted to do what they are supposed to do, it is hard to put on such trades, especially when the underlying investors in one’s fund are pension funds and families.
The crypto ice age is good news for the hedge fund industry where the focus is on understanding and managing risk, establishing relationships with proper counterparties and where governance and transparency now is the norm. Sure, there are bad apples and frauds, but they soon get washed out. Investors and counterparties won’t do business with those that do not have their houses in order.