Hedge Funds: Growth or Protection?

by Amy Bensted

  • 17 Jul 2019
  • HF


As geopolitical tensions and trade uncertainties intensify, the global macroeconomic outlook is increasingly uncertain. As a result, central banks have turned more doveish in 2019. With bond yields falling, however, equities have rallied this year following a hellish Q4 2018. With these tailwinds, hedge funds have had an extremely strong start to 2019. But what does this all mean for investors?

On the one hand, uncertainty is rising; on the other, valuations are strong in risk assets such as equities. So where to put capital: for protection or for growth? As we enter the last phase of the market cycle, investors may increasingly consider the active risk management that hedge funds can provide. Although hedge funds are not unaffected by downward market movements, it is their ability to mitigate losses and diversify risks that has produced attractive long-term Sharpe ratios. Now, perhaps, is the time for investors to look to hedge fund managers to help weather a future that looks increasingly stormy, and still access a healthy return.

Indeed, Preqin data indicates that investor appetite for hedge funds is increasing: we have recorded the highest quarterly number (220) of investor mandates in the period since Q1 2016. Although net flows into the industry are negative for Q1 2019 (-$22.1bn), an uptick in investment activity may plug some of the movement from the sector, if not spark a return to positive flows. At the very least, we are expecting high levels of activity as investors tactically redeem and reallocate capital.

In this period of extraordinary geopolitical activity, the future impact on markets grows more uncertain and divergent. Therefore, building a portfolio that is diversified – strategically and geographically – may help investors to navigate all possible market directions. The trick will be finding the right managers from the 17,190+ funds currently open to investment.

For further in-depth analysis on fundraising, deals, performance and investor data from the quarter, download the newly-released Preqin Quarterly Update: Hedge Funds, Q2 2019.

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