Patrick Ghali, co-founder of Sussex Partners, is on the frontlines of the research and decision-making in these unprecedented times, having worked with hedge funds and investors for decades on the shared hunt for alpha.
Ghali offered to share with Alternatives Watch his thoughts on what the hedge fund industry has weathered, and what strategies are likely to gain favor with investors next year.
Hedge fund performance was mixed in 2020, but demand for strategies will likely continue as investors are seeking yield in their investment portfolios all the while demand for investment strategies with convexity and niche allocations in Asia are also on the rise.
Sussex Partners was co-founded by Ghali in 2003 and is a regulated alternative investment specialist advising institutional investors on hedge fund and funds of hedge fund investments. The firm has grown with offices in Zurich, London and Cayman with dedicated staff in the U.S. and Tokyo.
AW: Are investors more likely to source new and/or emerging managers in 2021?
Ghali: With 2020 in the rear-view mirror, allocators will have to decide whether they believe that the run up in equities has further to go, or whether it was a “gift”. Many investors already felt that the gains in 2019 were not necessarily justified by fundamentals, and the pandemic hasn’t exactly helped in that regard.
The main topic for the foreseeable future will be the search for yield. With interest rates at historical lows, even negative in some major economies, investors are looking for innovative ways to generate returns. Any manager that can demonstrate a robust approach to this conundrum will certainly garner interest from investors.
We also expect to see a continued bifurcation of investor interest. The large amounts of capital looking to invest with some of the most established and well-known managers will not go away, but the imposition of, at times, onerous terms by some of these managers may deter some investors. If travel normalizes then we expect new or emerging managers to be of interest, especially if they can either solve the “yield/return” problem, step into the shoes of some of the large multi-strategy managers but with more palatable terms, or provide access to other niches where capacity is scarce (e.g., Asian macro). If travel remains constrained, and the strategies on offer from emerging managers are too “me too” type of offerings, they will struggle as investors will stick with the managers they already know and were able to properly diligence pre-pandemic.
UCITS funds to be another area of interest. While the universe has certainly improved vastly over the past few years, we expect new and interesting UCITS offerings to gain traction.
AW: What are realistic return expectations for the coming year?
Ghali: Most of our clients would be happy with a 5% steady return with limited risk, good liquidity and limited correlation to the markets, and we think this is a reasonable expectation. Targeting higher rates than this either means accepting significant beta risk (and accepting potentially significant losses at times), or suffering significant illiquidity (e.g., via longer lock up strategies).
AW: What alts strategy will receive the most traction in the coming months and why?
Ghali: We see a lot of demand for strategies away from traditional equity or fixed income, and that can provide good convexity in case of a sell off. These include certain systematic strategies, volatility arbitrage, and specialized macro (e.g., with an Asia flavor). We also see an uptick in demand for Japanese managers as Japan seems to be the last “fundamental market”. Additionally, China continues to be of interest as just like Japan, it is a less efficient market and hence hedge funds are able to generate significant alpha there.
AW: Any new due diligence techniques that investors may employ as the pandemic lockdowns continue?
Ghali: There is certainly more reliance on networks of contacts to cross check information. Though not the same as being able to go onsite yourself, being able to leverage trusted third parties can be helpful and people certainly seem more willing to help each other now than has been the case in the past.
