Inflationary pressures, geopolitical tensions and the threat of a potential recession have mired the global financial markets for much of 2022. The hedge funds as a whole, however, have outperformed the equity market this year.
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Looking ahead, the global financial markets, including the hedge funds, face more or less the same challenges as they did in 2022. One extra challenge that could show up next year is the COVID-19 pandemic. COVID-19 was comparatively quiet this year, but the rising number of cases in China could mean the return of the pandemic early next year.
All this means that hedge funds have a lot to consider for 2023 as well. Amid such a backdrop, let’s take a look at the hedge fund trends to watch in 2023.
Hedge Fund Trends To Watch In 2023
Following are some of the hedge fund trends to watch in 2023:
Inflation is at a record high and this could dampen the global financial markets, including hedge funds. Global macro funds, however, could emerge as a winner during such times. Global macro funds use political or economic events to make a profit, and there may not be a shortage of such events next year.
Larger hedge funds have performed better than their smaller counterparts in the current market downturn. With a similar macro scenario expected next year as well, larger hedge funds are likely to remain the center of attraction.
Historically, the hedge fund industry has been charging 2% management fee and 20% fee on realized gains. The average percentage fee, however, has been dropping. Hedge funds, on average, charged a management fee of 1.4% and performance fee of 16.4% in Q4 2020, compared to 1.6% and 19% a decade ago, respectively, according to the data from Hedge Fund Research (HFR) last year. This, however, is an average, meaning that some hedge funds (usually bigger ones) command higher fees.
The crypto market witnessed a massive fall this year following the collapse of FTX. Several hedge funds with significant exposure to digital assets witnessed a notable drop in their portfolio as well. Still, some hedge funds are bullish on crypto. London-based Man Group, for instance, is planning to come up with a crypto-focused hedge fund.
The rising interest rates could mean the end of cheap financing, and this could make it harder for the new funds to attract investors’ attention. This, along with high volatility and uncertainty, could mean we could see less of new launches next year.
DE&I (diversity, equity, & inclusion) and ESG are growing popular among investors. Though these things are almost non-existent in the hedge fund industry, more investors are now investing in women and minority-led funds than they were five years back, according to a BNP Paribas study.
Also, the COVID-19 pandemic has brought forward economic and social inequalities. Thus, more institutions are now working to overcome these issues. Institutions, such as pension funds, sovereign funds, and endowments foundations could play a vital role in this regard. These Institutions are big investors, and thus, going ahead, it is also possible that they filter funds on the basis of their ESG score.
The hedge fund industry is currently grappling with higher operating costs but a drop in fees. Thus, to survive and maintain their profit margin, more hedge funds are likely to outsource some of their operations, such as accounting, research, and more. Along with cost efficiency, outsourcing brings the benefit of different time zones as well.
To beat the competition, more and more hedge funds are adopting non-standard methods, such as AI and machine learning. The use of such non-standard methods assists hedge fund managers in improving the accuracy of their predictions.
Final Words
The above trends suggest that 2023 holds both opportunities and challenges for the hedge fund industry. Better use of technology could help hedge fund managers overcome the challenges, as well as reduce the risk. On the other hand, they can use outsourcing to compensate for the dropping fees. In all, there are good chances that the industry will continue to expand in 2023 and beyond.
