The coronavirus vaccine is here. Which private equity and hedge fund strategies are poised to benefit in this environment?

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.

Alternative assets under management ($bn), 2020 vs. 2025

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.

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.

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.

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%.

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.

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.