James has worked as a hedge fund manager for years. As someone who has always enjoyed multi-tasking, James brings his vast financial experience and his hedge fund background to his position as writer and editor for Hedge Crunch. Editor James Heinsman can be contacted at james(at)hedgecrunch.com.
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.
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 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.
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.
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.
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.
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.
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.”
Some companies stand the test of time, and Iconix Brand Group is one such example. Neil Cole founded the company, which has become the world’s second largest branding company. Iconix was named by Forbes Magazine as one of “America’s Best Small Companies” and it is certainly a company worth learning about.
They are currently the owners of 35 iconic brands and they represent $13 billion in annual retail sales. As marketing, brand management and merchandising experts, they specialize in licensing, merchandising and marketing/PR. Their portfolio includes a dizzying array of companies from Sharper Image and Royal Velvet to Waverly, Candie’s and Material Girl.
As the founder of Iconix Brand Group Inc., Neil Cole led the company to become the second largest licensing company in the world, only behind the Walk Disney Company. Their portfolio included a diversified group of intellectual properties that spanned fashion, home and character-based brands. They are certainly one to watch.
The FX market has been unpredictable for quite some time, but now it seems that hedge funds with a quantitative concentration—those known for making lightning-speed trades on grand scales—are looking at crypto for their next big investment move. Crypto’s value differs significantly across markets yielding a plethora of opportunities for hedge fund managers with strong computer skills and strategies to reap large returns swiftly; the extreme price variability offers quick profit.
Overall, crypto assets have expanded by close to 200% in the last year, going from less than $800 billion to $2.3 trillion. This growth can be attributed to the overall dearth of oversight in this area, leaving it wide open for market-making opportunities. The latest report from PwC indicated that quantitative trading strategies are used the most often in crypto exchanges. These approaches use a simultaneous buy and sell strategy to profit from price differences between coins; they are perfect for markets that are low compliance and highly fluid.
But only the swiftest and most agile hedge funds—those that manage to refine their trading practices in real-time—will manage to survive and thrive in this constantly changing market. They will need a comprehensive solution for their extant trading requisites that they can then use alongside mainstream market data. Managers will need to not only be connected to the regulated crypto exchanges but also bypass major counterparty-to-counterparty platforms.
Commodity analysts from Societe Generale report that money managers bought $7.1 billion in gold in February. This is the fourth-biggest week of bullish buying since 2006, when CFTC started its updated reporting. Most explanations for this rise point to recent geopolitical instability. While gold is an imperfect hedge for funds, it is an appealing asset against inflation and other stock market risks.