Since 2022, certain strategies have performed well and their prospects are excellent. A few questions for Kier Boley from UBP.
Stars of the market in the late 1990s and early 2000s, hedge funds saw their popularity decline following the financial crisis. But some funds continued to perform well and the asset class posted excellent results in 2022 and 2023. Since 2015, we have also seen the dominance of very large multi-strategy platforms such as those of Brevan Howard, Marshall Wace or Millenium. Kier Boley co-heads Union Bancaire Privée’s alternative investments, about $17 billion of which is exposed to hedge funds. He answers a few questions.
In recent years, hedge funds appear to have lost their popularity.
At the beginning of the 2000s, hedge funds enjoyed immense popularity, in particular because they represented an important element of portfolio diversification and offered attractive performances uncorrelated to traditional assets. Between 2010 and 2020, these performances declined, due to structural changes in the market, which had an impact on their popularity. In addition, since 2015, other alternatives have emerged in the form of private equity or private debt. Since the Covid crisis, however, we have seen a clear improvement in the performance of hedge funds, as well as a gradual increase in investor interest.
“Long/short equity strategies will continue to offer opportunities.”
Why did their performance deteriorate?
Because the industry has become more conservative, largely due to a changing profile of its investors. American pension funds have become very fond of it, which has generated much larger volumes and led to much more modest fees, all accompanied by much less audacious strategies. As volatility was very low, hedges were expensive and difficult to make profitable. Add that, post-crisis, regulations have tightened considerably, further weighing down costs. Until 2021 and the return of inflation.
What impact on the class at large?
The operating costs of an autonomous hedge fund being too high, many managers have grouped around very large multi-strategy platforms such as those of Brevan Howard, Marshall Wace or Millenium.
Why do these big platforms dominate the market?
They have been very active in hiring talent from across the financial sector, although recently they have turned against each other in a veritable “war for talent”. Furthermore, they spread their investments between a large number of strategies and managers within each of their strategies, which creates a certain diversification. Additionally, their cash-efficient operating model allows for over-allocation with greater leverage. Finally, being structured around the use of stop losses, traders have their risk allocation reduced as they lose money and will be completely excluded when they reach a specific loss level. This limits the loss that a trader can cause to the entire portfolio.
What about fees? Have they really fallen?
On UCITS formats, fees have undoubtedly decreased. They are around 1% for management fees and 15% for performance fees; strategies heavily exposed to market beta receive lower fees than those generating alpha. What we have seen appear on quality funds is a direct passing on of management costs to the end client, called “pass-through”. Which can ultimately represent up to 8% management fees plus another 20% performance fee. This is the approach adopted by large multi-strategy platforms. Suffice to say that they have to be very efficient to afford this type of fee and yet, their funds are closed and the waiting lists are very long.
Why is UBP one of the few private banks to have maintained its interest in the asset class?
Because far from the limelight, certain funds continued to perform very well – around 10 to 12% with a Sharpe ratio of 2 – and part of our clientele tended to prefer them to private funds. equity and private debt for their liquidity. Hedge funds obtained excellent results in 2022, when the markets suffered, but also in 2023. Private clients most often favor the UCITS format for liquidity reasons but institutional investors are perfectly satisfied with the off-shore version. in Luxembourg or Ireland with quarterly liquidity.
What assets do you manage in this asset class
Around $17 billion is exposed to hedge funds. Thanks to a team of 26 people spread between Geneva and London with a few elements in Paris and Hong Kong.
Which strategies worked best?
Over the last 12 to 18 months, long/short equity funds applying a GARP approach1 on quality companies in tech in the United States or luxury in Europe performed well. Market neutral strategies also performed well in 2022 and 2023 due to the dispersion of equity markets due to rate sensitivity. The healthcare, biotechnology and utilities sectors, for example, have struggled to adapt to rising interest rates. Global macro strategies also performed very well due to interest rate expectations and increased volatility. Without forgetting those on raw materials. On the fixed income side, the trading of “micro-rates” which plays on tiny differences in sovereign bond rates (in the USA, Great Britain or Europe) have performed well. Just like convertible bonds.
What are your perspectives on the class?
I am optimistic. Long/short equity strategies will continue to offer opportunities. This is also true of the energy sectors stimulated by the energy transition and arms spending. In this area, we can play gas against other fossil fuels. In the world of commodities more generally, both agriculture and metals have potential, copper in particular where supply is insufficient. Note that after 15 years of bear market, it is very difficult to identify quality hedge funds on commodities, most of the good managers having joined the large multi-strategy platforms. However, they are starting to appear again. Based in the United States, London and Switzerland, they often come from commodity trading companies which also master the physical aspects of trade and can adjust the risk between physical flows and futures contracts. We also see opportunities in long-short credit because the higher rates make it possible to better sort the potential of companies. If we remain in a more volatile market – inflation is likely to remain higher than in the past with interest levels higher than they were before 2020 – we will need higher targets. long term. Hedge funds should offer a stable return of around 8% (i.e. 4% above cash) which could lead investors to return to these strategies.
1 GARP: growth-at-a-reasonable-price
