Tom Kehoe, Global Head of Research at AIMA, discusses some of the hot topics for hedge funds in 2019, including delivering alpha, machine learning and responsible investment.
Bitcoin, cryptocurrency, ESG and GDPR were just a few of the hedge fund topics discussed the most throughout 2018. In thinking about industry prospects for the year ahead, it is useful to remind ourselves of the key themes highlighted in ‘Perspectives – Industry leaders on the future of the hedge fund industry’ published earlier this year. Many of these will be integral to the development of the industry throughout 2019 and beyond.
1. Delivering alpha versus harvesting beta:
The hedge fund industry is presented with a challenge: how can it reinvent its investment edge to meet the expectations of an investor base that is increasingly sensitive to fees? In AIMA research published earlier this year with PwC, we highlighted that investors increasingly wish only to pay for true alpha and not for the harvesting of beta.
Investors understand that alpha is highly difficult to produce on a consistent basis. They understand that it is an artisanal product. This means investors will remain willing to pay a premium to those actors that can deliver it. This also means they will be less willing to pay for undifferentiated returns accessible through highly scalable smart-beta strategies. Such strategies are of value but, increasingly, the fees being charged on them will likely be proportional to the value they add for investors.
2. Man and machine learning:
Hedge fund firms are being disrupted by revolutionary technologies that have already reshaped global industries, from international shipping to online shopping. Growing investor demand, an explosion of data and huge technological advances are pushing firms to become increasingly quantitative. Machine learning will not just affect a specific type of hedge fund firm, but the entire industry.
Every hedge fund firm will need access to simpler forms of machine learning. This will not only be to make predictions; it will be required to process the massive volume of data which they must analyze. But the future of the hedge fund industry will not just rely solely on technology and data – it will require the continual interaction of man and machine. In a sign of things to come, managers are already creating new roles for experts in machine learning and data scientists. We expect this trend to become more prominent throughout next year.
3. Responsible investment goes mainstream:
While good governance has always been important to investors, different forms of responsible investment are now more widely adopted across the hedge fund industry. Supported by growing demand from investors, improving ESG datasets and the wider availability of technology to facilitate the use of this data, we will likely see more hedge funds offering their investors responsible investment opportunities. The hedge fund industry cannot remain stationary. In ‘Perspectives’, managers revealed that hedge funds are ready for the future.
Hedge funds have never had the luxury of being able to stand still. Amid a series of emerging mega-trends, more than ever, the industry has had to justify its existence at every step of its journey. This has included constant challenges from investors to meet their highest expectations through to remaining at the forefront of modern investment techniques. Far from failing to embrace change, hedge fund firms are thriving on it. They continually explore new ways of protecting and growing capital for investors.
In 2018, AIMA suggested that these themes would be integral to the future development of the hedge fund industry. We expect them to become more pronounced over the coming 12 months.
For more exclusive commentary, as well as in-depth data and analysis on the hedge fund industry, take a look at our recently-launched 2019 Global Hedge Fund Report.