The coronavirus vaccine is here. Which private equity and hedge fund strategies are poised to benefit in this environment?
Private Equity Assets could Surge Past $9 Trillion by 2025
Relentless fundraising and strong investment performance will more than double the industry’s assets under management over the next five years, according to alternative investment data firm Preqin.
The piles of capital invested in private equity and venture capital are expected to climb much higher over the next five years.
Preqin has predicted that industry assets under management will more than double from $4.4 trillion at the end of 2020 to $9.1 trillion in 2025. This projection is partially based on a survey of alternative investors, 79% of whom planned to increase their allocations to private equity over the next five years. This includes almost a quarter (23%) who aimed to “significantly” grow their private equity portfolios.
“There appears to be no stopping private equity and venture capital,” Cameron Joyce, Vice President of Research Insights at Preqin, wrote in a blog post on the predictions. “We expect strong performance and net inflows into the asset class to drive a global growth rate of 15.6% over the period.”
Private equity assets have grown rapidly over the past five years, nearly doubling from $2.3 trillion in 2015 to $4.4 trillion in October. While the economic impact of the coronavirus pandemic and related fundraising challenges have caused industry assets under management to drop by about $70 billion this year, Preqin expects asset growth to resume next year. “Covid-19 has not dampened investor appetite for alternatives in the longer term,” Joyce wrote, noting that just 4% of the survey respondents planned to decrease their allocations to private equity.
Private equity assets under management ($bn)
Capital Expected to Flow to the Larger Managers
Preqin expects capital to flow into a smaller number of larger funds. This trend was well established going into the COVID-19 crisis: average buyout fund sizes increased from $765mn in 2017 to $1.3bn in 2019, while the annual number of funds closed dropped from 299 to 246. The pandemic has since presented LPs with operational challenges in the form of remote due diligence, so capital concentration is likely to accelerate as LPs stick to managers that they know. This makes for a challenging environment for emerging managers who are raising capital.
COVID-19 to Accelerate Existing Sector Trends: Tech-focused Growth & Venture Capital
The pandemic has also helped accelerate a number of industry-specific trends that GPs are likely to remain focused on. E-commerce, online grocery, and EdTech are just some examples of industries that could see an accelerated increase in market share in the post-pandemic environment. Technology-focused strategies will likely tap into these key themes, with growth and venture capital funds likely to attract significant attention.
Hedge Funds Gather Pace ahead of Year-End
As reported by Hedgeweek, hedge funds are storming into the final weeks of 2020, having notched up some of their biggest gains in decades on the back of the US presidential result and positive developments in the search for a coronavirus vaccine, with equity, event-driven, and cryptocurrency strategies all riding high last month.
Hedge Fund Research’s main Fund Weighted Composite Index grew 6.24% last month, its best monthly return since December 1999, and its second-biggest monthly rise since the index launched 30 years ago. Similarly, HFRI’s investable benchmark – the HFRI 500 Fund Weighted Composite Index – rose 4.6% in November, putting its year-to-date return at 5.6%.
Hedge funds generated record performance across a broad range of strategies, including equities, event driven and cryptocurrencies, said Kenneth Heinz, HFR president.
Equity-focused managers led the hedge fund pack – powered by the global stock market surge following November’s positive developments – gaining 8.73%. Year-to-date, the index is up almost 12%.
All equity sub-strategies were in positive territory for the month. Multi-strategy, fundamental value, and quantitative directional strategies all soared more than 10%, while fundamental growth hedge funds gained more than 8.83% and energy/basic materials strategies added 7.96%.
Meanwhile, event-driven strategies picked up 7.56% last month and have risen 5.37% since the start of 2020. Activist hedge funds topped the event-driven category, soaring more than 12% in November to put them into positive territory year-to-date at 6.66%, while special situations funds added 9.79% last month.
Relative value hedge fund managers gained 4.23% amid November’s rally - with all sub-strategies in positive territory - driving the HFRI Relative Value (Total) Index up 2.67% year-to-date. Here, fixed income sovereign-focused funds gained 4.20% last month, while multi-strategy funds added 3.51%.
In a recent interview with Yahoo, Tudor Investment Corp. founder Paul Tudor Jones predicted “an explosion” of economic growth in 2021 as the coronavirus vaccine is widely adopted and life slowly returns to pre-pandemic ways.
“The vaccine's going to bring us back. We're going to have an incredible growth rebound,” he said in the interview.
Even so, he said the stock market is reacting to a combination of fiscal and monetary policies the likes of which “we've never seen before in history,” pushing price-to-earnings multiples higher than they were in 2000 at the height of the dot-com bubble.
However, Jones anticipates “a second-quarter explosion” in retail and other industries. “And you're going to have this just massive boom,” he predicted. “And the consequences of that, I think, are pretty clear for fixed income.”
He said fixed-income prices will probably go down as interest rates rise. But he said commodities “will probably go up.”
Hedge Funds in the News
As reported by the Financial Times, Philippe Laffont’s Coatue Management has notched up a 52% gain this year through November thanks to bets on electric carmaker Tesla and against Wirecard, the fraudulent German payments group, making it one of the best-performing big hedge funds in the world in 2020.
Coatue is one of the biggest long-short hedge funds, which means it places wagers on some stocks doing well and on others declining, and Mr. Laffont is one of the most prominent of the “Tiger cubs” that cut their teeth at Julian Robertson’s hedge fund Tiger Management.
The fund’s focus on technology has served it well in the market mayhem of 2020, as tech stocks have dominated equity market returns. Coatue’s main fund manages more than $11bn.
Daniel Loeb’s Third Point LLC funds posted strong gains in November to extend year-to-date returns into the double digits after the billionaire investor overhauled his portfolio and the firm a few months ago.
The Third Point Offshore Fund gained 9.1% in November and is now up 12.3% for the year, while the Third Point Ultra fund gained 12.1% last month and is now up 14.2%, according to a performance update seen by an investor.
The gains were fueled mainly by investments in credit as well as fundamental equity bets, particularly in the media and internet and enterprise technology sectors.
Andrew Law’s Caxton Global Investment was up 2.8% last month through November 27, the next to last trading day of the month, according to a document from investment bank HSBC that tracks hedge fund performance. It is now up 36.3% for the year.
BH Global, meanwhile, posted a 1.78% gain in November and is now up 17.77% for the year, according to the firm’s monthly communication to investors. For the first 11 months of the year, interest rates accounted for roughly three-quarters of the gains. Commodities and credit also kicked in some gains, while foreign exchange cut into profits. The fund is run by London-based hedge fund firm Brevan Howard.
Through October, the Brevan Howard FG Macro Master Fund had gained a stunning 71.1%. Most of its October gains came from short U.S. dollar positions versus Asian currencies. The gains were offset in part by losses from long positions in precious metals and on tactical equity hedges, according to the report.
Brevan Howard Global Volatility Master Fund Limited had gained 40.76% for the year through October.
Hedge Fund AuM Forecasted to Increase 19.6% from 2020 to 2025, According to Preqin
According to Preqin, hedge funds have the potential to shine in a period with higher-than-average volatility, which has so far defined 2020. The next five years look likely to pose more economic and financial market risks than the past decade. The COVID-19 crisis has necessitated changes that likely will increase market volatility for years, such as increased debt loads of companies, central banks, and countries, while political risks also lie ahead as countries rethink trade policy and secularization. Hedge funds can exploit the resulting volatility for gain. Active management can work well in periods of uncertainty, proactively governing risk and drawdowns as demonstrated through Calmar ratios during H1 2020.
Preqin expects macro and equity strategies to remain the largest strategies in terms of AuM. Long/short equity and macro funds together make up over a third of core strategies targeted by investors in the next 12 months.
There is a good chance that trigger events will take place at an increasing pace in the next five years, increasing the opportunities for macro funds to trade.
Core strategies targeted by hedge fund investors over the next 12 months