From our vantage point as advisers to many of the world's top investment fund managers and financial institutions, broad market forces flow through to our instructions, and ultimately drive many of the terms of the funds we advise.
In this four-part series we look at the current themes we have noticed in the investment funds market. Parts one and two focus on Hedge Funds and parts three and four explore Private Equity.
All data, unless referenced, is taken from Walkers' in-house investment funds survey.
HEDGE FUNDS - PART 1
In our last trends survey in November 2017, our story was one of cautious optimism. Buoyed by a year of positive returns following the market rally in early 2017, hedge fund managers started 2018 with improved expectations of their own performance and prospects for fund raising.
According to the latest figures available from Preqin (Preqin Hedge Fund Performance Update: September 2018), hedge funds as a whole have continued to post positive returns in the first half of 2018, though not at the same pace seen in 2017. Event driven strategies and credit strategies have performed strongest on a year-to-date basis. While the overall asset flows reported by Preqin show a net outflow from the industry, the aggregate data obscures a stark regional distribution: North American managers saw net inflows in the first half of 2018 of $37.3 billion, with managers in Europe, Asia Pacific and the rest of the world experiencing a combined net outflow of $21.6 billion.
EQUITY AND CREDIT LAUNCHES CONTINUE TO DOMINATE
We registered more hedge funds pursuing an equity or credit strategy last year than all other strategies combined. This reflects a strong run of returns in 2017 relative to other strategies, and with increased volatility in equity markets in 2018, there would appear to be better opportunities in this sector than there have been in the last decade of broad growth across equity indices. In the case of credit fund launches, investors' continued appetite to participate in these funds' disruption of traditional credit markets has driven another year of launch activity.
A new asset class added to our survey this year covers funds formed to pursue opportunities in cryptocurrencies, initial coin offerings and other digital assets, and the growth in launches this year has been significant on a relative basis.
A HINT OF RELIEF IN FEE PRESSURES?
In prior surveys, we have found a slow but steady trend towards sub-2% management fees, and a gradual erosion of the traditional 20% performance fee. This year, our statistics are broadly consistent with these long-term trends, though slightly more funds than last year launched with a headline management fee of 2%. With performance fees, there was a modest uptick in the number of funds launching with a 20% performance fee (54%, up from 49%).
While these numbers might make for encouraging reading, and may to a degree represent a restoration of confidence among managers to at least include the traditional 'two and twenty' fee structure as the headline rates in their offering documents, they do not necessarily represent the full picture. Managers continue to make full use of side letters, founder share classes, reduced-fee classes with a longer lock-up period and other innovative approaches to fees in order to attract or retain investors.
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