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Quant Funds Prove Valuable to the Economy

Over the past year, quant funds, which use mathematical and statistical data to make investment decisions, have been buying stocks faster than ever before. Experts have determined that hedge funds that are driven by algorithms are more accurate than human analysts at detecting trends.

This increase in algorithm driven purchasing has helped the US stock market to rally despite pessimistic prognostications. Charlie McElligott, equity derivatives strategist at Nomura, explains, “These funds move fast and unemotionally. They’re not parsing through earnings or taking a view on the stickiness of inflation . . . this is about price trends and momentum.”

Representatives of Deutsche Bank have noticed that stock market exposure among active managers is at a low, but overall equities across systematic funds is on the rise, partially due to the rise in quant funds.  In spite of their positive influence on the market, quant funds still make up less than 10% of the hedge fund industry. Even so, they seem to have an oversized impact on the overall market. Deutsche Bank strategist Parag Thatte said, “We do see their trading has a big impact on equities, they don’t tend to lead the market . . . [but] they tend to amplify moves that are already happening.”

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Increased Regulation of Nonbank Financial Institutions on the Horizon

The federal government is attempting to increase its oversight of nonbank financial institutions. Nonbanks are companies that do not have a full banking license or are not supervised by a banking regulatory agency.

President Donald Trump made it more difficult for the government to regulate nonbanks, however Treasury Secretary Janet Yellen believes that the Trump administration’s rules increased the potential for hazardous risk within the financial system.

Under President Biden, a group of federal regulators are now suggesting that nonbanks be designated as systematically important. This designation would make it possible for the Federal Reserve to supervise them more intensely.  The Financial Stability Oversight Council approved the proposal, which will now be open to public comment for the next 60 days.

According to Treasury Secretary Yellen, nonbanks such as cryptocurrency companies, hedge funds, and money market funds have the potential to endanger the economic stability of the country if they are not properly monitored.  This was demonstrated by the March 2023 collapse of Silicon Valley and Signature Bank. Yellen explained to the Wall Street Journal, “The authority for emergency interventions is critical. But equally as important is a supervisory and regulatory regime that can help prevent financial disruptions from starting and spreading in the first place”.

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Investors are Optimistic About Crypto

London based Nickel Digital Asset Management recently commissioned a study of 200 institutional investors and wealth managers from multiple countries. 66% of respondents stated that in the next six months, they are planning to either begin investing or increase their investments in crypto and digital assets. This include 12% who say that they plan to ‘dramatically increase’ their digital investments.

The fact that investors are feeling confident about crypto investments cannot be taken for granted. Over half of those surveyed said their firms had reduced or sold their crypto holdings in the last half a year due to a long decline in valuations and market uncertainty.

According to hedgeweek.com, investors are even more optimistic when taking a longer term view of the sector. Only 17% of those surveyed said that crypto and digital assets was not an attractive sector for investors over the next five years, while 39% said it was very attractive, and 46% said it was quite attractive. Improved regulation and valuation recovery are the leading reasons behind this newfound confidence in digital investments, as 64% of respondents said that they expect significant improvements in the regulation of this sector, and 63% predict a bounce in pricing. 

Hedge Fund Investment in 2023

Are hedge funds a good investment for 2023? A number of experts are weighing in on whether world events like China’s hasty reopening from COVID and falling European gas prices will cause a recession, or if slowing inflation and rising interest rates will correct the problem. 

An international survey of 185 investors was inconclusive as to whether or not it was wise to put money into hedge funds at this time, given the instability in the market. 

Although commodity trading advisers (CTAs) returned a net of 16% in 2022, many who responded to the survey were not confident that this trend would repeat itself in 2023.

“People are at a crossroads on where to invest their money”, explained survey editor Marlin Naidoo. In 2022, approximately 30% of investors increased their investments in hedge funds, while 20% moved in the opposite direction. According to Reuters, many took investments from hedge funds that traded in stocks in order to invest in hedge funds that traded in bonds.  The responses to the survey reflect the different reactions that investors have in the face of all the uncertainty.

Investors might be convinced to continue contributing to hedge funds because they tend to perform better than other investments during times of higher inflation and higher interest rates. But at this point it is anybody’s guess what impact the events of early 2023 will have on the global economy.

High Cost Multi-Manager Hedge Funds Offer Large Returns

A Barclays note to clients recently explained that the fees for multi-manager hedge funds can be approximately three times the size of their peers, due to the fact that these funds dependably yield high returns.

The note indicated that while in the last five years the larger market has averaged a return of 5.5%, multi-manager hedge funds have averaged a return of 8.3%. Investors are, therefore, asked to pay a higher fee because they are very likely to receive a higher return. There are no fixed fees, rather the fees can rise and fall depending on the work of the traders. 

Generally, hedge funds have a fixed cost fee of 2%, with the fund owners taking 20% of the after cost profits. In multi-manager funds, the traders working at the fund receive bonuses, which are included in the hedge fund’s cost. This contributes to the higher cost, bringing multi-manager funds closer to a 7-and-20 charge instead of the usual 2-and-20.

According to Reuters, Barclays identified 42 multi-manager hedge funds managing a total of $290 billion in assets, including some of the world’s largest hedge funds.

Investors must pay performance related expenses even if the fund is not successful. They continue to pursue these funds, however, because of the consistently high returns which defray the increased costs.

 

Elliott invests multibillion-dollars in Salesforce

Elliott Investment Management has made a multibillion-dollar investment in Salesforce. Salesforce tripled its workforce over the past four years and purchased Slack in 2021 for $27.7 billion; the company also hired during the Covid pandemic. However, now Salesforce’s sales have slowed, leading to a period of layoffs and a deep stock market drop. Many of the executives have left the company, and Salesforce recently announced that it would be cutting 10% of its employees and reducing its real estate holdings.

Managing partner at Elliott explained about their investment,

“Salesforce is one of the preeminent software companies in the world, and having followed the company for nearly two decades, we have developed a deep respect for Marc Benioff and what he has built. We look forward to working constructively with Salesforce to realize the value befitting a company of its stature.” While Elliott has invested in many tech companies, it remains unclear what their goal is with their Salesforce investment. Their goals often lay in board representation and pushing for strategic inter-company changes.

Hedge Fund Debuts as Largest Woman-Led in Industry

SurgoCap Partners made history with its debut as the largest woman-led hedge fund internationally. Under its founder, Mala Gaonkar, SurgoGap Partners started trading on Tuesday, January 3, 2023 with $1.8 million under management. The SurgoCap firm will base its investments around areas in which technology can boost financial, industrial, and health care sectors.  

Gaonkar has an MBA from Harvard University and joined Lone Pine Capital as a founding partner in 1998. Before starting SurgoCap, she worked as one of three portfolio managers at Lone Pine from 2019-2022.

Gaonkar has incorporated her noteworthy use of technology for philanthropy into SurgoCap’s goals. Her past projects include co-founding the Surgo Foundation, which used AI and behavioral science to address health problems around the world. SurgoCap will put $100 million into smaller foundations, as well as nonprofits, that focus on climate change or serve underprivileged communities.  

Hedge Funds to Watch in 2022

As the year draws to a close, it is an opportunity to look at the investments being made by strategic money managers and what they are expecting to see from their capital moves. Tracking the recent quarterly activity of hedge funds that have taken large positions in particular companies or those that have expanded long-standing positions, allows us to highlight the bullish signals indicating a company’s prospects for yielding significant returns.

U.S. News and World Report published their list of 2022’s top hedge funds. The list included the “usual suspects”: Scion Capital Management LLC (Michael Burry of The Big Short fame), Citadel LLC (Ken Griffin), Bridgewater Associates LLC (Ray Dalio), Renaissance Technologies LLC (Jim Simons), and Elliott Investment Management LP (Paul Singer).

Modeling billionaire investors makes a lot of sense; they have proven results and loads of experience. But there is also a backlog. The data is often retrospective in nature. A hedge fund only files the 13F typically six weeks after the quarter has concluded, which leaves a big window for managers to offload.

Hedge Funds Now Playing in the Major Leagues

Sports teams and sporting franchises were once owned by families. Nowadays, even with the economic instability around the world, hedge funds and investment consortiums are buying up the big players.

In May 2022, Todd Boehly put together a conglomerate deal of $5.3billion to buy the Chelsea football club. Roman Abramovich, the club’s previous owner, put the team up for sale earlier this year. Clearlake Capital, a California-based investment firm, is the majority shareholder and Boehly is acting as the controlling owner.

Of particular interest is the fact that Boehly, who already co-owns the Los Angeles Dodgers, outbid 11 other investment groups—a clear sign that hedge funds and money managers see the Premier Leagues, and sporting names in general, as promising opportunities.

“[We] are seeing more money coming into sport from institutional investors,” said David Gandler, the co-founder and director-general of fuboTV, the American TV streaming provider.

Highest Hedge Fund Inflow in seven years

The current financial volatility, spiraling inflation, market uncertainty, hardline constraints of central banks, and geopolitical conflict in Europe seem to be doing nothing for the hedge fund industry. The assumption that investor involvement in the market might be reduced by all these factors, opting for care and restraint in tenuous times, is proving to be entirely unfounded.

Hedge Fund Research (HFR) recently released a report indicating that institutional investment in the first quarter of 2022 was the highest new capital hedge fund allocation since the second quarter of 2015. Furthermore, the research suggests that all those elements— inflation, increased interest rates, and war in Eastern Europe—are the motivators of this seven-year-high.

Will this hedge fund trend continue for the remainder of 2022? According to a Barclays’s survey from February of this year, the prospects are promising. The continued acceleration of inflation is likely to prompt investors to lower their exposures to cash, passive-equity, and fixed-income; hedge funds are the safe alternative. Preqin, an investment-data firm and hedge-fund specialist, on the other hand, is less hopeful. Looking only at performance, the first quarter of 2022 was among hedge funds’ most dissatisfying quarters.

“Institutional investors are likely to continue increasing their commitment to funds combining effective, volatility-positive, capital preservation with managers offering opportunistic exposure to interest rate and inflation trends, with these effectively complementing existing portfolio holdings and duration. Funds tactically positioned to navigate these multi-asset trends are likely to lead industry performance and growth through mid-2022.” 

Kenneth J. Heinz, president of HFR