Outlook Hedge Funds
Disclaimer: The information and materials prepared are for internal use only and on how the Dancap Family Investment Office (“Dancap”) views current market dynamics. Dancap does not guarantee the accuracy or completeness of the material and it is not intended in any manner to be investment, financial, legal, accounting, tax or other advice and should not be relied upon.
Dancap's Current Hedge Fund Strategy
May, 2023
Dancap has a significant track record of investing in hedge funds across various strategies through third party managers and separately managed accounts. This market overview focuses on the broader hedge fund industry and looks to provide an update on current market dynamics, outlook, and future risks. Dancap’s hedge fund portfolio is strategy agnostic and we look to team up with managers who have deep track records and expertise across market cycles. We also tend to avoid funds with hard lockups and side pockets.
Hedge Fund Strategy
In an environment where intra-stock correlations are low and intra-stock dispersion is high, hedge funds are better positioned to generate returns through their stock-picking and market-neutral strategies. These market conditions allow hedge funds to focus on individual stocks and take advantage of the mispricing in the market. Between 2020-2022, hedge funds generated 3.5% annualized alpha compared to 0% alpha between 2011 and 2019 ( 2011 – 2019 saw a significant rally in long only assets; a 60/40 global equity/bond portfolio would have returned 5.9% over risk-free rate with a 0.75 Sharpe Ratio). Specific strategies that performed particularly well in 2022 include managed futures (13% alpha); Discretionary Macro (7% alpha); Quant Equity (6% alpha), and fixed income relative value (6% alpha)
Drivers of Hedge Fund Alpha
Source: Barclays 2023 Global Hedge Fund Industry Outlook and Trends
Outlook
The hedge fund industry is expected to face challenges in 2023, according to a recent report by Barclays. Despite a strong year for hedge funds in 2022 generating almost 4% alpha, a number of factors could dampen investor returns in the years ahead. One key challenge is the potential for slowing global growth, as central banks continue to tighten monetary policy and as geopolitical risks continue to rise. This could lead to increased market volatility and a more challenging environment for hedge funds to generate consistent returns (alpha). Another challenge facing hedge funds is increased competition from other alternative asset classes, such as private equity and real estate. These asset classes have attracted significant inflows of capital in recent years, as investors have sought higher returns and greater diversification.
Drivers of Planned Hedge Fund Redemptions
source: Barclays 2023 Global Hedge Fund Industry Outlook and Trends
Despite these challenges, there are potential opportunities for select hedge fund managers in 2023. One area of focus for hedge funds is likely to be emerging markets, which continue to offer attractive investment opportunities as their economies grow and develop. These markets are expected to grow at a faster pace than developed markets, driven by factors such as rising populations, urbanization, and increasing middle-class consumption. Additionally, emerging markets can offer attractive valuations and the potential for high returns. Hedge Fund managers who are able to adapt to changing market conditions and focus on select opportunity sets, such as emerging markets may be able to generate strong returns and differentiate themselves from their competitors.
To see the Dancap Hedge Fund Investment Criteria and Portfolio, please click here.