Published on May 11, 2022 by Rathnakala Kumaragurunathan
Investors are experiencing a new set of risks in 2022 with persistent market volatility and uncertainty driven by the conflict in Ukraine, elevated inflation levels and central banks’ moves to tighten monetary policy. The following are key market trends we expect for hedge funds through 2022.
Trend #1: Investing opportunities with inflation
Although rising inflation, which reached a 40-year high in March 2022, poses a challenge for investors, it could benefit hedge fund managers pursuing relative-value strategies as spreads widen in an inflationary environment. Given the current macro backdrop, hedge funds could also reposition portfolios to take advantage of near-term opportunities in currencies and rates.
Trend #2: Alpha over beta
High levels of stock dispersions due to market volatility create a tailwind for relative-value strategies, a key enabler for hedge funds seeking alpha returns. These strategies are among the most protective in a rising-rate environment.
Trend #3: Opportunities in ESG investing
Responsible investing continues to gain prominence in 2022, with commitments to ESG and sustainability themes. A survey conducted by Barclays noted that 22% of investors prioritise ESG when deciding which hedge funds to allocate to. Carbon neutrality, in particular, is being considered a driver of corporate performance likely to attract greater investment flows.
Trend #4: Investments in digital assets
Although most digital asset investments are from high-net-worth investors at present, institutional investors are continuing to show interest, with several large institutional players penetrating the crypto space. According to PwC’s 2021 hedge fund analysis, 21% of hedge funds surveyed have invested in digital assets. Along with increased regulatory clarity and sound operational practices, we could expect hedge funds to increase their investment in this asset class. According to a survey by EY, 31% of hedge fund managers plan to add cryptocurrency to their portfolios within the next two years.
Trend #5: Using disruption to your advantage
Investment returns are increasingly driven by companies responding to disruptive technological innovation. As a result, biotechnology is a secular theme continuing to be backed by large intuitional players, with a focus on companies engaged in genome sequencing, tech-enabled procedures and digital healthcare. A relatively new theme focuses on technology solutions around cybersecurity, which are likely to prove resilient in an inflationary world, driven by the rapid expansion of cloud computing.
Trend #6: Outsourcing hedge fund functions
Outsourcing support has become a means of mitigating rising in-house costs and increasing complexities in hedge fund operations. Acuity Knowledge Partners’ hedge fund services handle time-consuming and non-core tasks, enabling clients to optimise capacity. We have set up dedicated teams of analysts (with MBA, CFA and CA backgrounds) across equities, fixed income, private equity and data science to support hedge fund functions. These teams work as an extension of our clients’ internal teams and produce exclusive output customised to client requirements.
Today’s challenging environment is causing more market volatility than experienced at the start of the pandemic. However, hedge funds willing to pursue diverse and uncorrelated strategies are likely to find opportunities in an array of near-term market dislocations and longer-term secular trends in 2022.
References:
Hedge Funds Outlook | J.P. Morgan Asset Management (jpmorgan.com)
How Do ESG Hedge Funds Stack Up Against Their Non-ESG Counterparts? (forbes.com)
3rd-annual-pwc-elwood-aima-crypto-hedge-fund-report-(may-2021).pdf
What’s in store for the hedge fund industry in 2022? (aima.org)
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About the Author
Rathnakala Kumaragurunathan
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Rathi has over 14 years of work experience in buy side equity research. She oversees the buy side engagements, Colombo – Sri Lanka. Rathi has extensive experience in setting up, scaling, and managing buy-side client engagements, in particular hedge fund accounts, and working closely with clients to meet their evolving needs and exceed their expectations. She has gained expertise in building and grooming talent and ensuring client requirements are met at the highest standards. Rathi Holds a Bachelor of Science in Economics and Management from the London School of Economics, a member of Association of Chartered Certified Accountants (UK), an associate member of the Chartered Institute of Management Accountants (UK) and a Certified Public Accountant (Australia).
FAQs
How are hedge funds doing in 2022? ›
Year to date cumulative returns for 2022 were down 11.42%. Growing global recession risks, rising interest rates and an inflation surge not seen in decades threatens to reverse a 10-year run-up in the U.S. S&P 500 index (.
What is the future of hedge fund industry? ›The industry survey suggests that the momentum achieved over the past year is still building and bodes well for healthy performance from the hedge fund industry in 2022. An era of solid returns, rising inflows and growing assets under management appears likely to continue for the foreseeable future.
What is the average annual return of a hedge fund? ›According to BarclayHedge, the average hedge fund generated net annualized returns of 7.2% with a Sharpe ratio of 0.86 and market correlation of 0.9 over the last five years through 2021.
What challenges do hedge funds face? ›Funds of hedge funds now face increased competition and greater scrutiny from investors; also, they are increasingly constrained by limited capacities and the higher correlation of hedge funds.
How much have hedge funds lost in 2022? ›Tom Kehoe, global head of research and communications at Aima, told Funds Europe: "On average, hedge funds have lost 4% over the year, but by comparison, investors in equity markets have lost 13%.
Is a hedge fund high risk? ›High-Risk. In general, hedge funds are considered to be high-risk investments because of the huge potential for money loss. Again, these funds are primarily controlled by hedge funds managers, and with pools of money going into investments, there is likely going to be some loss.
Will hedge funds exist in 10 years? ›Overall, the consensus is that hedge funds will continue to grow but will adapt to lower fees, greater use of technology, and increased access to retail investors.
Is the hedge fund industry growing? ›The market size of the Hedge Funds industry is expected to increase 8% in 2022. Has the Hedge Funds industry in the US grown or declined over the past 5 years? The market size of the Hedge Funds industry in the US has grown 8.8% per year on average between 2017 and 2022.
Why invest in hedge funds now? ›Hedge funds benefit from rising rates
Based on historical data, we find that hedge funds are fairly resilient to rising rates - on an absolute return basis, hedge funds have typically outperformed most other asset classes, with fixed income performing worst of all.
Bridgewater Associates
Bridgewater is the world's largest hedge fund, with about $150 billion in capital. Since its founding in 1975, Bridgewater has returned $52.2 billion in gains to its investors – more than any other hedge fund on the planet.
What is the biggest hedge fund in the world? ›
The average annual gain for the S&P 500 fund was 8.5%, or about 125% compounded for the decade. That means $1 million invested in the index fund more than doubled to about $2.25 million. For the hedge funds—not so much. The best one averaged 6.5% a year, or about 88% compounded.
What causes hedge funds to fail? ›Poor operations management. According to a Capco study, 50% of hedge funds shut down because of operational failures. Investment issues are the second leading reason for hedge fund closures at 38%. When breaking down everything that can go wrong, operations makes its case for number one.
What happens if hedge funds fail? ›First, the failure of a large fund (or a number with similar portfolios) could pose risks to banks and other creditors. If hedge funds had to liquidate a large market position quickly, prices could fall sharply, widening the circle of losses.
How often do hedge funds fail? ›[The] promise lasts long enough to get you and your children rich," Buffett explained. It's not surprising then that most hedge funds last about five years, and that one in three fails on an annual basis.
Are hedge funds losing money? ›Global hedge funds that bet on equity markets suffered the biggest withdrawals, losing $6.4 billion of the net outflows, Citco's report showed. U.S.-based hedge funds were big losers, followed by those in Asia and in Europe.
Do hedge funds go bust? ›Hedge funds have always had a significant failure rate. Some strategies, such as managed futures and short-only funds, typically have higher probabilities of failure given the risky nature of their business operations.
Are hedge funds a good investment? ›Hedge funds offer some worthwhile benefits over traditional investment funds. Some notable benefits of hedge funds include: Investment strategies that can generate positive returns in both rising and falling equity and bond markets. The reduction of overall portfolio risk and volatility in balanced portfolios.
What is hedge fund in simple words? ›Put simply, a hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivative products to generate returns at reduced risk.
Who owns hedge funds? ›Hedge fund management firms are often owned by their portfolio managers, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits.
Why is it called a hedge fund? ›
The term 'hedge fund' originally derives from the investment strategy of 'hedging' against market movements, maximizing returns and eliminating risks by choosing either long (buy) or short (sell) positions within the market – the aim being to profit regardless of market direction.
Are hedge funds good for society? ›Hedge funds contribute large amounts to non-profit organizations each year that benefit society. This includes everything from organizations that benefit the homeless, children, world hunger, the arts and education.
How much money do you need to start a hedge fund? ›With respect to establishing a U.S. hedge fund, average hedge fund startup costs range from $50,000 to $100,000, and first- year operational costs usually total $75,000 to $150,000.
How do hedge funds grow? ›Once a fund has accumulated investment dollars it earns money based on assets under management (AUM) as well as on fund performance. The more investment money a hedge fund can accumulate, and the better it performs, the more money it makes for itself.
What percent of the market do hedge funds control? ›Wall Street's billionaires club is growing: There are 98 new $1 billion hedge funds, according to research from Preqin, and the funds at that size control 88 percent of all the cash. There are 659 hedge funds operating with $1 billion or more, most of them concentrated in North America, the report said.
How many hedge funds are there in the world? ›New in-depth analysis by quant technologies provider SigTech, reports that after continued expansion in 2021, there are currently 27,255 active hedge funds globally.
What percent of the stock market are hedge funds? ›On average over the sample period, hedge funds own 7% of outstanding shares for the typical firm listed on NYSE, AMEX, or NASDAQ.
Where are hedge funds moving their money? ›Hedge funds have decreased their weight to leading tech names, which Jefferies calls in their report the “Sweet 16,” after the past four months of adding weight to these stocks. Hedge Funds have brought down their weight in the top four stocks: Google, Meta, Amazon, and Microsoft, by more than 1%.
How do hedge funds raise capital? ›Hedge funds raise money from individual and institutional investors who contribute capital in exchange for interests in the fund entity. Because hedge funds are generally prohibited from using any public advertising to attract potential investors, hedge funds are typically marketed through close networks.
How do hedge funds work? ›They pool money from professional investors and invest it with the intent of making a profit, also known as realizing a return on their investment. Hedge funds are typically managed by institutional investors who utilize a wide array of nontraditional investment strategies with the primary goal of mitigating risk.
What is the highest hedge fund return? ›
| Fund Name | 5-Year Annualized Net Returns through 2021 (%) | |
|---|---|---|
| 1 | Skye Global (West Palm Beach, FL) > | 49.66 |
| 2 | North Peak Capital Partners--Class E1 (New York) | 34.50 |
| 3 | Haidar Jupiter Composite (New York) | 32.07 |
| 4 | Atika Capital Partners (New York) | 31.00 |
Average gains of +4.00% lifted YTD average returns to +11.02%, past the level in 2019 (+10.07%) and to the highest level since 2009 (+19.44%). While average returns in 2020 were elevated, there have been several years of similar returns since 2009 (+10% in 2019, +9% in 2017, +10% in 2013 and +11% in 2010).
What is considered a big hedge fund? ›...
Table 1: The Universe of Hedge Funds Broken down by Size.
| Size | AuM | Total Number of Funds |
|---|---|---|
| Large | >US$500m (average US$693m) | 787 |
| Super-large | 10 largest hedge funds (average US$7,721m) | 10 |
There are 3,841 Hedge Funds businesses in the US as of 2022, an increase of 3% from 2021. Has the number of Hedge Funds businesses in the US grown or declined over the past 5 years?
What are famous hedge funds? ›- BlackRock Advisors.
- AQR Capital Management.
- Bridgewater Associates.
- Renaissance Technologies.
- Man Group.
- Elliott Management.
- Two Sigma Investments.
- Millennium Management.
The largest hedge fund in the U.S. is BlackRock, with a revenue of $19.374 billion. As of 2022, the U.S. hedge funds have a market size of $111.3 billion. There are at least 3,841 Hedge Funds in the U.S. U.S. hedge funds have experienced a CAGR of 8% in 2022.
Do hedge funds even beat the market? ›The big picture: Some hedge funds are sure to beat the index in any given year. But average hedge fund returns continued to lag — in a big way, according to data provided by eVestment. Event-driven-activist strategies came closest to the S&P's 28.7% gain last year, returning 27.3%.
How many hedge funds beat the S and P? ›The S&P 500 has returned 29% this year. Only 3 hedge funds on this list have beaten this. Thanks for playing! Hedge funds don't get rich because of their returns, they get rich because of their fees.
How many hedge funds outperform the S&P? ›Indeed, 80% of global hedge funds outperformed the S&P 500, and 44% produced positive returns in April.
How many hedge funds survive? ›Goldman, which has helped launch and finance thousands of hedge funds, said almost all newcomers survive their first year but that only 62% of all funds remain in business after five years. The “break even point after which less than half of managers ...
How long do most hedge funds last? ›
In a short 20 year span, the market has seen many hedge funds rise to prominent positions only to come crumbling down later. The average life of a hedge fund is 7 years! This is much lower than the average life of a corporation.
Who is the best hedge fund manager? ›| Rank | Profile | Managed AUM |
|---|---|---|
| 1. | Bridgewater Associates, LP | $235,542,378,467 |
| 2. | Balyasny Asset Management | $180,959,433,560 |
| 3. | Tiger Global Management LLC | $124,655,466,641 |
| 4. | Garda Capital Partners | $124,164,445,000 |
Yes, you could start with much less capital, or go through a hedge fund incubator, or use a “friends and family” approach, or target only high-net-worth individuals. But if you start with, say, $5 million, you will not have enough to pay yourself anything, hire others, or even cover administrative costs.
Which hedge fund shut down? ›Melvin Capital, once one of Wall Street's most successful hedge funds which then lost billions in the meme stock saga, will shut down after it was hit again by this year's market slump.
How much should you invest in a hedge fund? ›Some hedge fund entities require a minimum investment amount ranging from $25,000 to $100,000, or in some cases as high as $1 million from accredited investors. Those investing in hedge funds are typically wealthy individuals who can invest in the minimum without becoming too concentrated in one fund.
How are hedge funds performing in 2022? ›Year to date cumulative returns for 2022 were down 11.42%. Growing global recession risks, rising interest rates and an inflation surge not seen in decades threatens to reverse a 10-year run-up in the U.S. S&P 500 index (.
How many fund managers beat the market? ›On average, roughly 35% of managers have outpaced the S&P 500 in any calendar year, based on annual results back to 2007.
How many actively managed funds beat the market? ›Just 26% of all actively managed funds beat the returns of their index-fund rivals over the decade through December 2021, according to a separate report published last month by Morningstar.
Is the hedge fund industry growing? ›The market size of the Hedge Funds industry is expected to increase 8% in 2022. Has the Hedge Funds industry in the US grown or declined over the past 5 years? The market size of the Hedge Funds industry in the US has grown 8.8% per year on average between 2017 and 2022.
Are hedge funds outdated? ›Overall, the consensus is that hedge funds will continue to grow but will adapt to lower fees, greater use of technology, and increased access to retail investors.
Are hedge funds still relevant? ›
Hedge funds have continued to exist, with a few select firms still managing to perform extremely well. However, the industry as a whole seems to have lost some of its allure.
How did hedge funds do in 2021? ›According to Citco, hedge funds had inflows of $52.5 billion and redemptions of $38.9 billion, which resulted in net inflows of $13.6 billion. That's more than twice the net subscriptions of the fourth quarter of 2021. Again, larger funds, those with assets over $10 billion, were the biggest beneficiaries of new money.
How do hedge funds grow? ›Once a fund has accumulated investment dollars it earns money based on assets under management (AUM) as well as on fund performance. The more investment money a hedge fund can accumulate, and the better it performs, the more money it makes for itself.
What percent of the market do hedge funds control? ›Wall Street's billionaires club is growing: There are 98 new $1 billion hedge funds, according to research from Preqin, and the funds at that size control 88 percent of all the cash. There are 659 hedge funds operating with $1 billion or more, most of them concentrated in North America, the report said.
How many hedge funds are there in the world? ›New in-depth analysis by quant technologies provider SigTech, reports that after continued expansion in 2021, there are currently 27,255 active hedge funds globally.
Why do hedge funds perform poorly? ›Why are hedge funds a terrible investment? Well, it's because they have too much diversification . See, a hedge fund can invest in all sorts of assets like real estate, stocks, bonds, derivatives, and commodities. All of these investments generally have a lower return than the stock market.
What percentage of hedge funds fail? ›Across the entire hedge fund industry, the risk of financial loss remains quite low. Consider that during the period analyzed, the percentage of funds that failed (for any reason) never exceeded 0.5% in any given year.
What is the 2 and 20 rule? ›"Two" means 2% of assets under management (AUM), and refers to the annual management fee charged by the hedge fund for managing assets. "Twenty" refers to the standard performance or incentive fee of 20% of profits made by the fund above a certain predefined benchmark.
Do hedge funds help the economy? ›Although some studies suggest that hedge funds can manipulate stock prices, the academic literature generally finds that hedge funds help financial markets by providing liquidity and improving price efficiency.
What is hedge fund in simple words? ›Put simply, a hedge fund is a pool of money that takes both short and long positions, buys and sells equities, initiates arbitrage, and trades bonds, currencies, convertible securities, commodities and derivative products to generate returns at reduced risk.
Are hedge funds suffering? ›
Hedge funds suffered a net $7.8 billion outflows in the second quarter of 2022 as market uncertainty ushered investors to keep their assets risk-free. Hedge funds investing in equity markets suffered the biggest withdrawals, experiencing $6.4 billion in net outflows.
What is the most successful hedge fund? ›Bridgewater Associates
Bridgewater is the world's largest hedge fund, with about $150 billion in capital. Since its founding in 1975, Bridgewater has returned $52.2 billion in gains to its investors – more than any other hedge fund on the planet.
1. BlackRock Advisors. BlackRock (BLK) is a New York-based investment manager that manages trillions in assets. The largest BlackRock entity, BlackRock Fund Advisors, has been in operation since 1984 and oversees $1.9 trillion in assets.
Can hedge funds beat the market? ›Charted: Hedge funds still can't match the S&P 500
2021 wasn't the year for hedge funds to finally outperform passive investing. The big picture: Some hedge funds are sure to beat the index in any given year. But average hedge fund returns continued to lag — in a big way, according to data provided by eVestment.