Man FRM Early View – December 2019
As we enter 2020, the hedge fund universe feels like it has morphed again. Bigger is better (or at least, more resilient) and the arms race for finding an ‘edge’ in the alpha game is both increasingly expensive and apparently one of diminishing returns. The bank replacement theme feels like it has run its course, and now larger multi-strategy hedge funds with hundreds of component parts are sweeping up both talent and alpha from the rest of the hedge fund industry. For the smaller hedge fund players things are more bifurcated than ever – the few funds that still have discernible alpha raise a lot of money quickly and close their doors to new investors, while the many fund managers with no discernible alpha scramble around for assets for a few years hoping to get lucky; most eventually close down or join one of those multi-strategy behemoths.
This concentration of alpha generation in fewer hands, so reminiscent of the way FANG stocks dominate the stock market, is highly problematic. These are not charities and while the winners don’t take all, they do tend to take an awful lot. Transparency, fees and liquidity often put these funds out of reach, on principle. But there is a bigger issue here: it’s fairly obvious that the capacity and therefore also the returns of the industry if concentrated in a few hands all with the same objectives must be very much in question. Between them they own a high proportion of the market, a startlingly high proportion of the turnover and they must surely be dealing very heavily with and against each other? While no one in our shop looks like giving up the fight for alpha, we think it will be ever harder to deliver the stuff in sufficient quantity to be really useful to investors.
Perhaps the real utility of a lot of hedge fund skills is not alpha production. Perhaps this is a marketing story that has got out of control? In this piece we suggest three big trends for the next decade in which hedge fund skills are more directly applied to the most pressing investor problems: targeting risk levels, diversifying asset allocation away from pure equity dominance, and ESG.
The full article is available at https://www.man.com/maninstitute/man-frm-early-view-december-2019