Multi-Strategy Hedge Funds - Sector in Brief

Each quarter, we publish insights on how demand for external asset management—in the form of manager search activity across various asset classes and sub-sectors—is changing (Manager Intelligence and Market Trends). Every shift in the cycle brings with it ups and downs in the popularity of different investment strategies. Today, we sit in a fundamentally altered macroeconomic regime: it has now been more than two years since the US Federal Reserve began meaningfully hiking rates and, while these may now have peaked, there are no signs of a return to a ‘low interest rate’ climate over the short-to-medium term. The after-effects of more than a decade of quantitative easing are still being felt by markets. Geopolitical tensions add to the complexity.

Yet, beyond market shifts, a myriad of other themes affect manager selectors in complex ways: changes in the very nature of institutional investment, the needs of the entities that demand it and the shape of the industry that supplies it. I was recently invited by an industry magazine to share my top three subjects affecting 'allocators' in 2024.

1. Decarbonisation and impact imperatives



Both asset managers and manager selectors are on a steep learning curve when it comes to the implementation of portfolio decarbonisation, positive ‘impact’ or both. Targets are already in place for many investors, even as measurement methodologies take shape. Investors must avoid pitfalls, such as carbon ‘tunnel vision’ leading to a suboptimal strategy. Related subjects such as biodiversity are increasingly featuring on investors' priority lists.

Best practice differs across asset classes. The manager/product universe is evolving rapidly and average track records for some of the most interesting segments may be short. The investment consultant industry, which has spent the last decade trending towards scale-based efficiency, must now try to cover a rapidly growing and changing fund landscape, across both mainstream asset classes and newer segments (e.g. Nature-based Solutions).

Read more on this:

• Natural Capital Investing: an Introduction to Forestry, Agriculture and Carbon Credits
• Impact in Private Equity: What is Best Practice?
• Climate and Biodiversity in Equity Investing
• What Is Sustainable Infrastructure Investing Now?
• Carbon Trading Strategies: Sector in Brief


2. Private markets face winds of change



The private market fundraising slowdown of 2023 has contributed to manager stress: capital raising periods have lengthened; target sizes appear less achievable to some GPs. At the other end, delayed exits and extensions are pushing back the pace of revenue generation. Valuation gaps between sellers and buyers do appear to be reducing but mismatches persist, particularly in sectors with lower demand. Today’s higher risk-free rate has also led investors to question fee structures.

Although we expect fundraising to improve (the stabilisation of interest rates, for example, could support demand for real assets), manager selectors should keep a particularly watchful eye on corporate stability when selecting partners. Asset manager consolidation has been a major theme across the broader industry over the past decade, but corporate upheaval has been particularly visible in private markets: global managers have been buying up private market firms; large alternatives houses have acquired complementary boutiques; new specialist firms continue to spin out, sometimes burning their prior masters in the process. This trend was previously shaped by the tailwind of rising inflows for most illiquid asset classes; today, it is being moulded by a more challenging fundraising environment.

Read more on this:

• Open-end Infrastructure Withstands Investor Cooldown
• Manager Intelligence and Market Trends: Quarterly Analysis (February 2024)
• Private Equity Secondaries Sector in Brief


3. Wealth managers and DC: no longer the ‘poor relations’ of the institutional world



With traditional shared-risk pension provision (e.g. Defined Benefit) on a long-term downward trajectory, the investment industry has been reorienting to suit clients with aggregated-individualist models. These include Defined Contribution entities that corral a myriad of fundamentally member-controlled accounts, and Wealth Managers that are courting HNW, UHNW and Mass Affluent clients.

Many of these groups are seeking to deliver sophisticated portfolios, efficiency and technological solutions (e.g. platforms to aggregate private market investment). We’ve seen these selectors demanding greater advisory support as they expand into a broader range of investment strategies. Meanwhile, traditional institutional investors—including pension funds and endowments—must consider the implications of their manager’s shifting client base and the potential misalignment issues that may arise as investors with fundamentally different liquidity requirements continue to grow in prominence.

Read more on this:

• Wealth Manager Investment Survey
• Investor Spotlight: Aoifinn Devitt, CIO of London CIV (formerly of Moneta Group)
• How do Open-end Private Credit Funds Square the Circle?
• Rise of the Allocators: Multi-manager Models for Alternative Investing
• Revisiting the Case for Listed Real Assets

An edited version of the comments above was published in IPE Magazine, April 2024 print edition.