General Trends:

1. Artificial Intelligence: AI is becoming pervasive in hedge fund strategies with tools such as ChatGPT APIs combined with big data, machine learning, super-fast processing speeds, and proprietary investment frameworks converting insights into trading strategies faster than ever.

2. Asset Class Competition: The HFRI Fund Weighted Composite Index was up 7.57% in ’23, relative to the 24.23% performance of the S&P 500.  This reflects an upside capture ratio of 31%.  Hedge funds have tough competition to make it into portfolios today with the S&P 500 performing strong, risk-free rates extremely high, and other alternatives such as private credit competing with strong risk-adjusted returns.  Nevertheless, well positioned hedge funds with higher returns, lower vol and lower correlations can raise significant capital today.

3. Sharpe Ratio in Focus: I still remember learning about the Sharpe ratio in ‘01 when I got into the hedge fund industry, and it’s as relevant as ever today.  As a measurement of annualized returns over the risk-free rate divided by vol, it reflects the need for managers to outperform relative to the risk-free rate with measured vol.  1.0 is considered acceptable, 2.0 is very good, and >3.0 is quite rare.  In today’s higher risk-free environment, producing an attractive Sharpe ratio is much more difficult, and that reflects two barbell strategies competing for hedge fund money: treasuries and the S&P 500.  Hedge funds with mid-single digit returns aren’t competitive, nor are high vol strategies that don’t produce correspondingly high returns.  Only the best will thrive in today’s environment.

4. Large Institutional Allocations: Large allocators are diversifying their hedge fund investments, focusing increasingly on mid-sized and emerging managers, moving beyond the traditional large hedge funds to capture higher returns and benefit from fee breaks. That being said, the increasing concentration of capital amongst the largest hedge funds continues.

5. Growing Preference for Managed Accounts: Large investors are showing increased preference for individually managed separate accounts, seeking greater control over assets, better expense management, and enhanced transparency. Single-name SPVs are becoming more common for activist strategies.

6. Importance of Quality Marketing: Effective sales and marketing strategies are becoming critical for hedge funds to attract and retain investors, with a small proportion of managers expected to attract the majority of industry assets.

Strategies-Specific Trends:

1. Equity Long/Short Strategies: These strategies are anticipated to perform above the industry average in ‘24, driven by a rise in short rebates, broader valuation differences and fundamentals in equity markets, and varying economic conditions across major regions. This includes a focus on US generalist strategies, European and Asian regional strategies, and sector specialists.  Japanese managers appear to be attracting outsized interest compared to historical trends.

2. Event Driven: Increased anticipated M&A, spin-offs, IPOs and other events as capital markets thaw are attracting interest, especially among skilled activist investors.

3. Reinsurance: Attracting attention due to its uncorrelated nature and substantial price increases, the reinsurance strategy is expected to see significant inflows from large institutional investors.

4. Crypto: Crypto currencies are back into focus with strong bitcoin performance, newly approved ETFs and the next bitcoin halving expected in April ’24.

5. Shift in Strategy Preferences in Economic Downturns: In the event of a recession, investor interest is expected to increase in strategies such as distressed debt and other uncorrelated strategies like commodity trading advisors (CTAs) and relative value managers.

Here is the link to the article on LinkedIn.