Hedge funds at the ready and steady for a 2021 comeback

As service providers anecdotally report new capital inflows and new hedge fund launches, the industry seems to be kicking off the New Year on a high note. New hedge fund launches increased to the highest level in five quarters in the third quarter of 2020, according to industry data provider HFR. Officials said that the rise comes as managers and investors are positioned for performance gains and capital growth. Prominent hedge funds such as Bill Ackman’s Pershing Square reported gains topping 60%, making 2020 a blockbuster year for his investors, especially those in his SPAC, which is still trading a significant discount to NAV after raising $4 billion in its IPO in July. Overall, hedge fund launches increased to an estimated 151 in the third quarter, which made it the highest quarterly launch total since the second quarter of 2019. The figure also exceeded the estimated quarterly liquidations for the first time since the second quarter of 2018, perhaps reflecting a key turning point for the industry. “After posting strong gains through the tumultuous 2020, investors are actively increasing exposure to hedge funds, including cryptocurrency strategies, and are positioning for growth in capital and new launches in 2021," stated Kenneth Heinz, President of HFR. SS&C GlobeOp's Forward Redemption Indicator for December 2020 was 3.95%, reflecting lower redemptions compared to the 4.95% reported a year ago, according to Bill Stone, chairman and CEO of SS&C Technologies. “With December's reading, redemptions have fallen on a year-over-year basis for each of the past six months in a row, demonstrating strong investor confidence in hedge fund managers' ability to produce favorable risk-adjusted returns during the market volatility driven by COVID-19,” he added. According to HFR’s figures, fund liquidations fell to an estimated 137 in the third quarter of 2020, which was a decline of more than 50% from the liquidations in the first quarter of 2020 that totaled 304. Returns, experts said, have remained strong and positive. Year-to-date through November, hedge funds were up 6.1% broadly, and ahead of gains of the DJIA that was up only 3.9% over the same time frame. Equities of course led the way for hedge funds though, with the equity hedge strategies notching 10.9% gains in the first 11 months of the year. Stealing the show are similar investment trends that Alternatives Watch has followed across the alternative investment world -- technology and cryptocurrency. Tech-focused hedge funds were up 23.5% for the year-to-date through November, according to HFR, while crypto was up a staggering 156% for the year-to-date. The key question is whether the gains can last going into the uncertainty of the long-term effects that the pandemic will have on the global economy going into 2021. “Macroeconomic and geopolitical risks have shifted heading into 2021, with near-term focus on the resolution of U.S. congressional elections, the incoming presidential administration, the economic impacts of UK/European trade relations, and the efficacy of vaccination programs globally,” observed Heinz. “Hedge funds have successfully navigated extreme dislocations throughout 2020 and, as a result of this, are likely to continue attracting institutional investors as a portfolio mechanism to reduce overall volatility and direct equity and interest rate beta, while opportunistically positioning for elevated levels of volatility across asset classes into 2021.”

Hedge funds at the ready and steady for a 2021 comeback

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