Hedge Funds

Global Outlook
SPECIAL REPORT 2020

In association with
 O V EContents
RVIEW

2020 Top 10 tech predictions Chapter 1: The macro picture

04 How do you think the global macro picture
might play out in 2020?

T
o introduce the Hedgeweek Global Outlook Report 2020, the team at Chapter 2: Equity markets
RFA has made the following 10 predictions on technology and how they 07 What is the biggest risk and/or opportunity to
might impact the industry over the next 12 months. We took a considered alpha generation in 2020?
approach before settling on these 10 trends based on what we’ve seen across our 07 If you had to offer a general prediction or
client base, the conversations we’ve had (and continue to have) on a daily basis, trend for short selling activities in 2020, what
as well as from research into business drivers and emerging technology: would it be?
1. Spend on technology will increase (for successful firms anyway). Studies show that profitable firms spend
proportionately more on technology than their counterparts with shrinking margins. Interesting that the old Chapter 3: Credit/CLO markets
adage “spend to accumulate” is appropriate for technology spend too. 09 What is your broad outlook/prediction for the
2. Hybrid and public cloud use will increase as the major vendors continue to add more services. BUT this will year ahead?
add complexity so managers will need to engage with experts in public cloud management.
Chapter 4: ESG & diversity
3. SaaS adoption will continue to rise due to its simplicity, reliability and predictability. From OMS to CRM
11 What new trend might we see in respect to
systems, SaaS adoption is growing.
ESG considerations in hedge fund portfolios
4. Serverless Computing will continue to grow in popularity simplifying operations and enabling agility for
in 2020?
managers.
12 To what extent do you think Diversity and
5. Data analytics intelligence will improve workforce optimisation and inform product and service transformation.
Inclusion will become a growing factor in how
This is a huge growth area across the sector – we have multiple projects going on with clients to give them
hedge funds build their portfolio teams in 2020
better data analytics as well as live dashboards and cloud based data warehousing.
(and beyond)?
6. The “digital workspace” will be even more important. Employees expect and will soon demand the freedom,
the flexibility and tools to do their jobs well from anywhere without relying on phones or email. Chapter 5: Investor allocations
7. Hedge fund managers will use AI technology to power automation solutions that will drive efficiencies 14 What is your outlook on strategy selection for
and allow them to do more with less manpower as well as utilising automation tools within workflow 2020?
management. 15 What should investor expectations be for
8. Managers will strive to keep headcounts as lean as possible. They will do this by continuing to outsource hedge fund performance in 2020?
functions. 16 How do you think the GP/LP relationship
9. Security Operations, Automation and Response (SOAR) will be the buzz phrase of 2020. As attacks increase might evolve?
in velocity and sophistication, so responses must become faster. Intelligent cybersecurity is the way forward.
10. Technology Risk Management will take centre stage in 2020. Risk assessments are critical for hedge fund
Chapter 6: New trends
18 If you had to make one key prediction for the
managers.
hedge fund industry for 2020 – either broadly
or in respect to a specific strategy – what
George Ralph, Managing Director, RFA (UK)
would it be?
18 What new method or approach for accessing
hedge funds could we potentially see in the
year ahead?

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Chapter 1
The macro picture

I for one expect a non-disruptive Brexit. And once

this becomes part of consensual thinking sterling
will enjoy its deserved rally and economic activity
within the UK will accelerate to an impressive
run-rate. The latter will be helped by an inaugural
fiscally expansionist Budget from this new British
Government. Indeed it is no exaggeration to claim
that this Chancellor has scope to change the UK
fiscal landscape not seen for decades.”
Dr Savvas Savouri, Toscafund Asset Management

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 T H E M AC R O P I C T U R E

How do you think the global macro picture might play out in 2020?

DR SAVVAS SAVOURI UK will accelerate to an impressive run-rate. The latter will be helped by an inaugural
Chief Economist and Partner, fiscally expansionist Budget from this new British Government. Indeed it is no exag-
Toscafund Asset Management geration to claim that this Chancellor has scope to change the UK fiscal landscape
Fathoming the macro outlook for 2020 not seen for decades.
has been made a great deal more dif- As much as the UK economy will enjoy a boost from the public purse be in no doubt
ficult in the wake of events in the first it will also be spurred-on from private sector investment, funded from within and over-
days of this new decade, where we have seas. Having seen purchasing manager sentiment fall throughout 2019 and inventories
seen a nerve-racking escalation in US/ bled as a consequence, also be prepared to see these rebuilt, providing a welcome
Iranian tensions and indeed across the boost to production. In relation to the UK labour market, here too I anticipate the signs
wider Middle East. The reality is that of softness coming through during those ever so uncertain times in the second half of
economic matters were complicated 2019, to be reversed; with hiring freezes thawed and job creation stimulated.
enough at the close of last year. After all Over on the Continent I expect the realisation that the monetary policy tank is
we entered 2020 with both Sino-US trade empty to trigger a not dissimilar fiscal response (to the UK); something which has
and UK-EU divorce terms unresolved; long been needed but resisted; notably within Germany and other hard-core EU
the seemingly interminable nature of Member States. One has to also add that the boost to investment and consumption
both having taken its economic toll widely across all continents through 2019. Only within the UK cannot fail to produce a welcome lift to those across the EU27 who
adding to concerns is the paltry monetary manoeuvrability to navigate away from eco- deliver on this, emphasising the importance of an orderly Brexit.
nomic headwinds, which exists in the US, Japan, Eurozone and indeed UK. This of course returns us to existential tensions in the Middle East. Yes, these
We find ourselves then at what seems a hardly encouraging point in time. And are extremely troubling, all the more so given the leaderships in both Tehran and
yet I cannot fail to be encouraged that the self-interest which Adam Smith famously Washington are not known for their diplomatic predictability or subtlety, with moreo-
wrote about in his seminal Wealth of Nations back in 1776, will see us through 2020 ver one side fixated on re-election and both already embroiled in a proxy war within
in better shape than many warn we should be prepared for. Syria, where Saudi Arabia is also involved.
Yes, China has recorded an economic slowdown. But unlike those with little cred- This said, it is not in the interests of any of the participants for events to escalate
ible monetary manoeuvrability Beijing has it, and will use it; as we have just seen with into a full-blown military conflict, not least because none can afford it; and by afford
yet another lowering in the banking reserve ratio requirement. On top of monetary I mean not merely in terms of human capital but also financial. Just consider the
stimuli China also has recourse to draw upon the considerable sovereign savings spike in the price of oil. This hardly serves the interests of its consumers and as for
piled-up over recent decades. I am also convinced that Beijing will ensure that trade its extractors such as Saudi, Iran and Iraq, its price is hardly relevant if its delivery is
tensions with the US de-escalate, since such an outcome is what best serves China’s disrupted through sanctions and sedition.
internal economy. My outlook then for 2020 is that despite the seemingly multiple and interminable
Moving on, the clock is ticking for the UK and Europe to deliver a seamless Brexit problems facing the global economy, resolutions will be reached to each and all. I
or instead face a hard shock. But since neither side could possibly benefit from the make this claim not least because all the major participants around the world will
latter, I for one expect a non-disruptive Brexit. And once this becomes part of con- accept that unless solutions are found, the downside would be unprecedented and
sensual thinking sterling will enjoy its deserved rally and economic activity within the as such, entirely immeasurable.

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 T H E M AC R O P I C T U R E

GEORGE PAPAMARKAKIS XUAN SUN

Co-Founder, Managing Partner & CIO, North Asset Management Vice President & Portfolio Manager, Hathersage Capital Management
I still think re-loosening of monetary policy has been the main cause of market As a new decade begins, we suggest completely forgetting about the question
performance as opposed to the underlying fundamentals. You need to have an repeatedly asked over last decade: what will be the catalyst that finally ends the
explicit and overt fiscal policy to support growth and central bankers are now constant feedback loop that exists between ultra-low interest rates, debt expan-
endorsing this. It’s the first time in quite a while that they are now talking about sion, low asset price volatility, and the financial engineering which allocates risk
fiscal policy and recognising that there is a limit to the efficacy of further monetary systematically based on that low volatility environment? There will be no ending.
easing. So that is an important juncture. The microstructure of financial markets has been irreversibly altered by the
Does it mean we are going to see things change in 2020? Probably not but unprecedented heavy injections of liquidity from central banks over a now more
I wouldn’t be surprised if they do in 2021 and we start to see inflation picking than ten year period. Fixed income markets with wide-spread negative interest
up. This could be driven by a new US administration, resulting in an increase in rates are now the norm.
fiscal policy and other wage or social redistributive income policies, and also by Global macro players must come to terms with the dramatic changes that have
increased fiscal policy in Europe as we get closer to the German elections…but occurred and take a fresh look at the way they generate alpha. Adaptations need
we need this year to play out first. to be made to find new ways to produce persistent alpha in this new paradigm.
We are already seeing signs of increased fiscal policy in the UK, where expan- Is it a surprise to see the alpha of global macro players fading in financial
sionary fiscal policy now will probably have to pick up the slack of Brexit. In the markets? In physics, the fine-structure constant, generally denoted by alpha, and
UK right now, you can borrow 30-year money at 1 per cent and inflation is at 2 quantifying the strength of the electromagnetic interaction between elementary
per cent; any orthodox analysis would tell you that you should be investing when charged particles is known as a critical constant of our universe. However, it is
you can borrow with negative real rates. not really a constant at all. Its value has been found to differ both by location and
over time. Perhaps alpha in the financial markets can also be thought of in terms
of the natural laws of the universe.

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Chapter 2
Equity markets

My prediction is that the

‘capitulation’ on ‘fundamental-driven’
short selling we are living through as
investors redeem from funds in the
asset class, taking more directional
risk, will come to an end in 2020
with a major short alpha recovery.”
Emmanuel Hauptmann, RAM Active Investments

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 EQUITY MARKETS

What is the biggest risk If you had to offer a general prediction or trend for short
and/or opportunity to alpha selling activities in 2020, what would it be?
generation in 2020?
BEN AXLER
Founder & CIO, Spruce Point Capital Management LLC
EMMANUEL HAUPTMANN The environment for short selling is robust and attractive. There are a couple reasons
Founding Partner, RAM Active Investments why. First, the equity market rally in 2019 was largely based on an interest rate cut
The largest risk for alpha from stock selection in induced multiple expansion, and a belief that the trade wars will de-escalate. Large
2020 remains central bank interventions. cap corporate earnings didn’t grow much (particularly after removing the effect of
Artificially low interest rates are leading to an stock repurchases and other Non-GAAP adjustments), and now companies must
un-selective inflation of financial asset prices prove in 2020 that their historic multiple expansion is warranted. This sets up many
across asset classes. stocks for extreme earnings disappointment relative to inflated expectations.
They lead investors to take more risk in parallel Secondly, passive investing overtook active investing in 2019. Passive investing has
to less and less attractive valuation levels, making one big drawback in that it generally requires indiscriminate buying (all stocks good
it very difficult for a risk-aware stock selection and bad) to mimic a benchmark, and assumes that the financial reporting of companies is fairly stated.
process to out-perform. This is often an inaccurate assumption. At Spruce Point, we dig beyond the numbers to determine if they are accu-
It also gives a false sense of security to rate, sustainable and fairly represented, and take an activist approach. Passive investing by its nature doesn’t do this,
investors, which tend to crowd into cheap market or try to affect change for a better outcome. While short-selling will always be difficult, with unique forensic research
vehicles like ETFs that often pay no consideration and an activist approach, it will still be possible for short selling to add alpha in 2020.
to either risk or fundamentals, driven by Size,
self-perpetuating mega-caps and large caps out-
performance of small and mid-caps. EMMANUEL HAUPTMANN
This environment is strongly reminiscent of the Founding Partner, RAM Active Investments
market environment at the start of the year 2000, The current large outflows suffered by Market-Neutral funds are leading to short covering of positions by hedge fund
two decades ago, which proved to be the start of managers, which helps maintain very inflated valuation levels for a large number of low quality companies.
a multi-year recovery for stock selection alpha, My prediction is that the “capitulation” on “fundamental-driven” short selling we are living through
and for active managers capturing the attractive as investors redeem from funds in the asset class, taking more directional risk, will come to an
valuation opportunities lying around mostly within end in 2020 with a major short alpha recovery.
small and mid-cap segments. The extended market cycle alimented by artificially low financing costs and extremely low
risk aversion now offers investors attractive short opportunities, on one side with zombie
companies making it through so far thanks to ever cheaper financing, on the other side with
over-hyped growth names trading at exuberant valuation levels.
As volatility makes a comeback and the uncertainty of the current fragile economic
environment gets priced in, it is likely both these short profiles will provide strong
return and de-correlation potential from the rest of the market, paving the way for
a strong recovery of the Market-Neutral asset class.

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Chapter 3
Credit/CLO markets

We expect the market growth to be

muted based on a dearth of new-
issue collateral for CLOs. I would also
expect to see debt spreads grind
tighter as equivalent investor
appetite adjusts to a smaller new-
issue pipeline.”
David Moffitt, LibreMax Capital

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 CREDIT/CLO MARKETS

What is your broad outlook/prediction

for the year ahead?

DAVID MOFFITT
Head of Tactical Investment Opportunities and CLO
Management Investment, LibreMax Capital
We expect the market growth to be muted based
on a dearth of new-issue collateral for CLOs.
I would also expect to see debt spreads grind
tighter as equivalent investor appetite adjusts to a
smaller new-issue pipeline.

PIERRE VANNINEUSE
Founder and CEO, Alpha Blue Ocean
We expect the current extraordinarily
low interest rate environment globally
to continue, and indeed there may be
further interest rate cuts by central
banks in economies which are facing
slower growth or turbulence, such as
the UK as it exits the EU. One of the
consequences of post-crisis monetary
policy in Europe has been that the
banking sector has been
reluctant to provide growth
capital to dynamic smaller
businesses, which cre-
ates opportunities for
Alpha Blue Ocean to
provide innovative financ-
ing solutions to such
businesses.

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Chapter 4
ESG & diversity

As part of digging deeper into the role of culture,

in 2019 we took a much closer look at the key
decision makers and the equity holders of
hedge funds and we were very disappointed by
the level of (or lack of) diversity in that cohort.
So we’ve been spending a lot of time talking to
hedge fund managers about it and working
through possible action lists with them, as well
as more broadly about culture.”
Sara Rejal, Willis Towers Watson

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 ESG & DIVERSITY

What new trend might we see in respect to ESG considerations in hedge fund portfolios in 2020?
ROB FURDAK
CIO for ESG, Man Group
Man Group believes there are
several ESG trends that will
emerge in hedge fund portfo-
lios in 2020.
The first is wider adoption
of ESG into the investment
strategies. We are seeing
a growing supply-demand
imbalance for ESG hedge fund
strategies, with a dramatically
growing demand and a dearth
of supply. The big question
is whether strategies can be developed to meet asset MICHAEL STEIN ALEXANDER KALLIS
owners’ return and ESG expectations. Senior Portfolio Manager, Alternative Investments, Managing Partner and Head of Investments, Milltrust
The second is the use of new and varied data sources Citi Private Bank Since the Global Financial Crash, there has been an
for responsible investment. These data can be useful to While Citi Private Bank has a number of ongo- increasing demand for GP transparency and reporting
analyse some of the softer ESG issues, especially in the ing initiatives in the ESG space, it remains more among investors. Given their fiduciary responsibilities,
social category. challenging to find hedge funds that are solely ded- professional investors need to be able to monitor the
Finally, we believe measurement and analytics will icated to ESG. We’ve generally seen larger asset investments and the risks contained in their portfolios. It’s
move more directly into the spotlight in 2020. Asset managers take the lead in this area, but we expect important for managers to align themselves with what the
owners are allocating to ESG strategies to make the that as demand from investors grows that we will market expects.
world a better place and their constituents are demand- see increased participation from hedge fund man- We’ve just launched a climate impact fund: a long-only
ing evidence that they are achieving that objective. agers. Many allocators including ourselves are equities fund focused on Asia Pacific. For these types
Greenwashing is one of the biggest risks to responsi- actively encouraging hedge funds to incorporate of strategies, investors are becoming a lot more strin-
ble investing and evidence-based analytics are the best ESG considerations into their investment philoso- gent and sophisticated in terms of what information they
response to that. phies and product offerings in line with Citi’s overall need to see with respect to a manager’s ESG or impact
To meet this investor need for better data and measure- initiatives in this area. reporting.
ment, last year we launched Man Group ESG Analytics, a I think ESG analysis will become a base standard
proprietary dashboard-style tool allowing the firm’s invest- for fund managers within the next few years. You won’t
ment teams to monitor non-financial risks and analyse necessarily be able to find a manager who is not includ-
ESG factors across single issuers, portfolios and indi- ing some sort of ESG analysis within their pre-screening
ces and provide portfolio proxy voting performance and investment criteria. Everyone is going to use it as part of
statistics. their research and reporting processes.

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 ESG & DIVERSITY

To what extent do you think Diversity and Inclusion will become a growing factor in how
hedge funds build their portfolio teams in 2020 (and beyond)?

SARA REJAL
Head of Liquid Alternatives, Willis Towers Watson
When we invest in asset managers, there are several aspects we take into
consideration. One of these is the role of culture, which we believe is a key
ingredient for long-term success, and D&I sits at the heart of culture. As part of
digging deeper into the role of culture, in 2019 we took a much closer look at the
key decision makers and the equity holders of hedge funds and we were very
disappointed by the level of (or lack of) diversity in that cohort. So we’ve been
spending a lot of time talking to hedge fund managers about it and working
through possible action lists with them, as well as more broadly about culture.
There’s pressure from us as investors, but there’s also a lot more resource to
help hedge fund resolve the gaps in their portfolio teams. We expect there to be more focus on this in 2020.
When assessing diversity, we attempt to understand the cognitive diversity and ability to leverage a variety
of different perspectives in various decision making processes. We look at gender and ethnic diversity as two
important lenses that may serve as strong indicators of potentially more powerful cognitive diversity. We look at
the diversity of senior investment decision makers who are responsible for crucially important investment deci-
sions and also at the diversity of owners of our preferred asset management firms.
Examples of things we will be encouraging and looking out for, as part of the culture engagement, include:
• Purpose – what benefits does the firm bring to their clients and employees but also to society and the planet?
• Inclusion – what work/life balance improvements can be made to allow for a cohesive and accepting environ- BARBARA ANN BERNARD
ment, with the ability to be flexible with work times where needed? How do the leadership behave in response Founder, Wincrest Capital
to these initiatives? Is there a cultural acceptance across the firm? Homogeneity of thought is risky. On the other hand,
• Assessments – are the staff appreciated for their diversity? How are teams rewarded which allow for their diverse investment teams enhance resilience because
diverse talents to flourish and for them to maintain their work/life balance? diversity can reduce portfolio risk, promote innovation
• Training – how open-minded are they in sourcing their talent, from backgrounds that are not “traditional” or and improve returns. As consultants and clients begin
identical to the founders? Have they considered hiring senior women with diverse skills rather than exact to demand greater gender and cognitive diversity, it will
experience, and then training them up to fit the roles they need? What time horizon do they have in building become an increasingly important factor in how hedge
the right teams? funds build their portfolio teams. Albourne Partners, for
Are these changes also taking place at the senior, key decision-making and equity owner level? We are passion- example, has started an D&I initiative. In 2020 and beyond,
ate about this topic and we will withdraw investment from asset managers who do not demonstrate sufficient I foresee other consultants following Albourne’s lead.
regard for culture, including D&I.

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Chapter 5
Investor allocations

Investors should expect hedge fund returns

to remain idiosyncratic. There will be winners
and losers according to the underlying
investment strategy and the levels of alpha
and beta captured by each hedge fund.
Continued geopolitical uncertainty is likely to
result in dispersion of returns, particularly
amongst discretionary strategies, where
managers may hold opposing views.”
Andrew Relph, Burren Capital Advisors

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 I N V E S TO R A L L O C AT I O N S

What is your outlook on strategy selection for 2020?

DON STEINBRUGGE
Founder & CEO, JIM NEUMANN
Agecroft Partners CIO, Sussex Partners
Strategies that will gain Here are my 2020 Picks & Pans:
assets in 2020 include: Top Picks: Diversifying, Uncorrelated Strategies
• Commodity Trading Top Pans: Directional Equity or Leverage-Reliant Strategies
Advisors (CTAs) – CTAs
Picks: The basket approach is favoured here with a mix of uncorrelated strategies. It has been a bit surprising
have historically had low
to hear the negative outlook on global macro from other industry participants at some recent forums, as both
correlation to the capital
discretionary and systematic macro seem to be lining up to continue their newfound performance. The focus in
markets and performed
global macro has been on blending styles as well as geographies.
well in 2019. Investors
The upward march of equity markets seems to have resulted in the volatility short-sellers getting increasingly
will increase their allo-
bold, particularly in Asia. This global subdued volatility in not just equities but fixed income, currencies, and
cation to CTAs in order to reduce tail risk across
commodities, only makes a sophisticated exposure here more attractive. This is particularly true against the full
their portfolio.
to stretched market valuations and the complex geo-political backdrop. Given that Asia has been a hotbed for
• Specialty long/short equity – Managers perceived to
structured note issuance which is accompanied by issuers having to sell volatility cheaply, this region is a good
have an information advantage or focus on less effi-
place to begin sourcing managers.
cient areas of the market will see inflows. These could
Away from the liquid diversifying strategies, which have been a focus for a year, some manager-
include managers that focus on small cap stocks,
sourced idiosyncratic event and more distressed exposures seem more timely. The problem
emerging markets (e.g. China) and specific sectors
with waiting to allocate to distressed until the cycle is clear and actionable is that capital may
(e.g. healthcare). In addition, broad valuation differ-
be scarce. Therefore, investing some portion of an eventual budget will ensure some level of
ences and fundamentals are expected to impact equity
participation in the initial, non-picked over stage of the cycle. Event driven strategies that require
returns more meaningfully in 2020 allowing more active
tangible manager infrastructure and expertise to harvest alpha can also provide some uncorre-
managers to outperform.
lated returns designed to be persistent no matter if the equity markets begin to fade or not.
• Relative value fixed income – Strategies that provide
liquidity to complex/less-liquid fixed income securities Pans: Okay perhaps directional equity driven is a bit too broad a stroke and certainly
have replaced bank proprietary trading desks. Skilled all can recognise the power of equities to enhance a return stream. If shifting from
managers generate most of their return through alpha long-only equity into equity long/short, a tight net is favoured (+/-25 per cent) for
and actively hedge market risk. the upcoming period. Also favoured are sector specialists, not too narrow, and
• Strategies that blur the lines between private equity geography specific funds where fundamentals may continue to hold sway. Here,
and hedge funds – Most of these are private lending/ Japan remains a favourite, as do TMT and Healthcare given their broad scope
specialty financing and reinsurance. These financing and dynamic state.
strategies do offer an attractive alternative to traditional As liquidity can be fleeting given the structural changes to the market,
fixed income, though there is growing concern about strategies that rely upon leverage and liquidity from third parties are to be
how they will perform in a market downturn. avoided under the start of a new cycle where a re-pricing will make execution
less important.

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 I N V E S TO R A L L O C AT I O N S

CÉDRIC VUIGNIER
What should investor expectations be for
Portfolio Manager OYSTER Alternative hedge fund performance in 2020?
Uncorrelated Fund, SYZ Asset Management
In this constant search for alpha, we
believe three themes will stand out over ANDREW RELPH
the 12 months ahead. Head of Business Development,
Burren Capital Advisors
Capturing bond arbitrage
Investors should expect hedge fund
The first is convertible bond arbitrage,
returns to remain idiosyncratic. There
which involves capturing value in the dif-
will be winners and losers according to
ference between a convertible bond and
the underlying investment strategy and
its underlying stock. The outlook for this
the levels of alpha and beta captured by
strategy has not changed significantly over
each hedge fund.
the last year. It can take advantage of a more volatile environment and at the
Continued geopolitical uncertainty is
same time maintains a position in the equity market. This strategy is also backed
likely to result in dispersion of returns,
by a favourable corporate action pipeline and improved US new issuances, thanks
particularly amongst discretionary
to a new tax law.
strategies, where managers may hold
Go big in Japan opposing views.
Secondly, we think there is value to be found in Japan, perhaps ironically given our Market-neutral strategies should
conviction the world’s developed economies are threatened with ‘Japanification’. remain uncorrelated and continue to
Yet, thanks to recent reforms under Prime Minister Shinzo Abe, Japan’s corporate protect capital, and although expectations
sector is undergoing profound changes. for returns should be steady rather than
By making cash more expensive for businesses to hold, Japanese companies stellar, I foresee investors tilting toward
are being encouraged to engage in more corporate activities such as merger and such strategies to hedge beta exposure
share buybacks. This is working. Activity is picking up, creating opportunities with in well-priced markets. Indeed, short sellers face a fertile hunting ground and may profit
more value for shareholders. in 2020 from exposing corporate excesses built up over the last decade.
Overall, the ‘accommodative’ interest rate environment will weigh on hedge fund
Disruptive technology
strategies anchored to risk-free returns. Currency hedging costs driven by regional
Finally, our third investment theme for the year ahead is ‘Machine Learning.’ We
interest rate differentials will continue to eat away at performance for non-US investors.
are at a stage where machines are data mining to build models and make dis-
Allocators therefore face the choice of accepting increased risk to achieve target returns,
coveries in a range of fields that are independent of human hypotheses. This has
or risking underperformance by maintaining a steady risk-budget.
created a race for data, and among investors, a search for alpha in the market.
Regarding merger arbitrage specifically, unlevered returns in the low-to-mid single
These are investable technologies, through highly specialised managers, working
digit range should be achievable, with higher returns commensurate with the amount of
to optimise portfolios and create investment and forecasting models.
leverage each fund employs.
Each of these themes, we believe, has the potential to add usefully diverse
sources of return to investors’ portfolios.

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 I N V E S TO R A L L O C AT I O N S

How do you think the GP/LP relationship

might evolve?

RAYMOND NOLTE
Co-CIO, SkyBridge Capital
I think we will continue to see some modest fee compression; they contracted a small
amount last year, but not to the same extent as in prior years. I also think we will con-
tinue to see good transparency and communication by GPs as to what is going on their
fund strategies.
The view on hedge funds, whether it’s from the HNW investor community or institu-
tional investor community, is that some will throw in the towel and conclude they are just
not getting the returns they want, but at the same time others are saying the opposite.
In their view, now is the time to be putting more money into these strategies because
of the correlation properties and how they help from a portfolio construction standpoint.
As such, there could be a tug of war between the GPs’ and LPs’
perception of what the GPs should be doing.
Low to mid single-digit returns with a low volatility profile
are not enough for some investors who feel they cannot jus-
tify the fees. To that response, I say, you have to look at the
risk-adjusted returns net of fees: do they still represent good
value? A better Sharpe ratio, net of fees, is still good value but
some investors look at absolute returns and want double digit
performance from their hedge fund investments.
Other investors look at rates on US 10-year Treasuries
trading at 1.80 per cent and it doesn’t get them close
to the actuarial rates they need to achieve. Moreover,
the probability is they will lose money at some point
when rates reverse (and bond prices fall). In their
view, it is worth holding hedge funds with a 7 or 8
per cent return and low correlation to bonds.
Achieving 10 or 15 per cent from the market is
just not a realistic number these days. You can’t
squeeze blood from a stone.

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Chapter 6
New trends

Value investing’s 12-year underperformance

will come to an end as the market begins
to recognise the risk of overpaying for strong
fundamentals. A rotation out of mega-cap
FAANG stocks will benefit long-abandoned
small-cap and value-oriented shares.”
Barbara Ann Bernard, Wincrest Capital

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 NEW TRENDS

If you had to make one key prediction for the hedge fund What new method or
industry for 2020 – either broadly or in respect to a specific approach for accessing hedge
strategy – what would it be? funds could we potentially
see in the year ahead?
JIM NEUMANN
CIO, Sussex Partners
As 2020 is now firmly in the windshield, investors need to assess their portfolios with
an acknowledgement that broad asset rallies, even those aided by central banks,
cannot go on ad infinitum. Couple this with uncertainty in the economic/geopolitical
landscape and plotting the path forward seems to cry out for a more active approach.
20/20 foresight is hard to achieve but worth striving towards in 2020.

BARBARA ANN BERNARD

Founder, Wincrest Capital
“Mega Crowded” – Value investing’s 12-year underperformance will come to an end
as the market begins to recognise the risk of overpaying for strong fundamentals.
Over the last twenty years, the two largest companies in the US market averaged
roughly 57% of the total market cap of small-cap stocks, but at the end of Q3, this had
risen to 92%, according to Royce & Associates. A rotation out of mega-cap FAANG MICHAEL STEIN
stocks will benefit long-abandoned small-cap and value-oriented shares. Senior Portfolio Manager, Alternative Investments,
Citi Private Bank
MICHIEL MEEUWISSEN At Citi we continue to move away from evaluating
Co-Head of Alternative Strategies, Kempen Capital Management hedge funds in isolation and toward understanding
We expect Insurance Linked Investments and Asia-focused Long / Short Equity to how they fit into a client’s multi-asset class
perform best in 2020. With respect to ILS, the pricing environment in the retrocession portfolio. For example, equity long-short hedge
segment of the market (i.e. reinsurance for reinsurers) is expected to be favourable funds with a net long bias need to make sense
going into 2020 resulting from a projected supply/demand dislocation of the back of within a client’s equity allocation and present a
severe catastrophe loss years in 2017 (hurricanes) and 2018 (wildfires) in combination compelling opportunity relative to other expressions
with the (partial) withdrawal of a few key retro players from the market. of equity risk.
With respect to Asia-focused Long/Short Equity, we like the combination of more
attractive valuations, large inefficiencies allowing stock pickers to add value long and short, and lower correlation
between regional markets such as China and India.

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