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Hedge funds have delivered a new era of alpha since the pandemic and are well-placed going into 2025, according to Richard Quigley of Goldman Sachs Asset Management.
In a wide-ranging interview on the latest episode of the AFI podcast, Quigley highlighted the industry’s strong returns and opportunities presented by a new generation of “high-quality” launches.
He foresees greater flows into the hedge fund space this year, but sounded a note of caution on multi-PM platforms, saying single managers also had a big role to play.
The global head of the hedge fund client business at GSAM, responsible for all business dimensions at its $27bn hedge fund strategies platform, was speaking alongside Jon Caplis, founder and CEO of PivotalPath, a hedge fund research firm, which has called 2024 a “vintage year” for hedge funds, with its core index up 10.4%.
Performance trends
Quigley does not see last year as a one-off. “ I’d like to just step back a little bit and take a longer term view,” he says. “If you look at the five-year numbers, they’ve been very strong both in terms of the absolute numbers [and] the underlying quality, durability and breadth of the returns.
“Just looking through most of our core portfolios, they’re outperforming [60/40] over five years. They’ve offered very attractive spread over risk-free [rate], which is important to most clients, and they’ve done it with relatively low beta.”
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Some have ascribed strong recent hedge fund returns to the higher-rate environment.
“If you look over the five year period it’s obviously much more than that, because we had the Covid dislocation. We had the inflationary spike. We then had tightening rates, and we now have stabilising rates. [Hedge funds have] shown the ability to generate durable returns [in] quite a different set of macro-economic circumstances.”
He describes 2024 as “a great year” with returns driven by more than the equity bull market. “Our macro managers did very well trading rates and currencies,” he says. “Quant and stat arb funds generally did a very good job of navigating some interesting factor-style and geographic rotations in the broader equity markets. And the multi-PM funds had another very strong year.”
Launch environment
GSAM was a day-one investor in many of the most established names in the industry, going back to the 2000s and before, and remains invested in many. Quigley is positive about the outlook for the top launches today and prefers early investment.
“W e think it’s a great time to get involved with funds, high quality funds, because you’re often able to get capacity to shape terms and really develop a foundational relationship.”
Last year saw five $1bn-plus day-one raises (three of them multi-billion), pointing to a robust hedge fund launch market, an outlook backed up by figures from PivotalPath.
The New York firm has tracked 145 launches where the founder’s most recent firm was a $1bn+ hedge fund (start-ups which have launched or will launch between Q1 2024 and Q2 2025).
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Quigley says the bar to launch a hedge fund now is nonetheless “much higher than it was five to 10” years ago. That means only the very best make it, but they tend to be strong offerings.
“You’re typically getting portfolio managers that are very well trained; at a good point in their career; have really in-depth portfolio management experience; and also have the wherewithal to effectively set up a fund front to back so that it’s fully operationally built out from day one.”
Niche opportunities
He is excited in particular by the prospect of working with “smaller specialist firms” which offer great opportunities at a time when there has been an “enormous flow of capital” to the large multi-strats.
“We have a view that there are a lot of really outstanding niche funds that are effectively under-capitalized [and] offer the opportunity to really access interesting sources of alpha, in a really differentiated way. Secondly, these are managers that are generally more open to working with us in different ways.”
Many of GSAM’s recent investments in newer managers have been via separately managed accounts, he adds, reflecting a growing industry trend.
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“That’s allowing us to calibrate the volatility, gives us a look through into the portfolio and a completely different framework for working with that manager.
“We’re also relatively active in co-investing. Where we’re looking at actually investing in individual trades, there have been greater receptivity to that as well.”
Platform dominance
Quigley described the rise of multi-managers as the “biggest trend in the industry over the last four or five years. The multi-PM platforms have generated the most alpha, garnered the most flows and arguably been the most innovative, in terms of data and technology and expanding their footprint.”
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He believes investors are right to consider them as a critical component of portfolios, but is not the sole answer. “What I would say on the other hand, is these are extremely difficult businesses to build and to sustain. You’ve got to acquire investment talent, you have to make massive investments in technology, you have to have process and infrastructure in place to get the best out of them at a time when many other funds are trying to do the exact same thing. Not surprisingly, you see a lot of dispersion.”
Being invested in the very best firms is crucial. “You also need to realise that doing that in and of itself has its own challenges because the capacity is scarce. The fees are increasing as their investments are increasing. Liquidity is becoming more constrained.”
Allocator trends
Quigley notes “very good” sentiment among allocators to hedge funds and expects greater flows to follow. “ It’s strong, but it’s broad in the sense that we’re seeing interest, not just from the traditional pensions and endowments and family offices, but in what I might call more non traditional allocators,” he says, highlighting the “ mass affluent channel”.
He also noted regions of the world “where there’s been historically a lot of scepticism,” like central Europe, were warming towards hedge funds.
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Allocators remain extremely discerning. “The bar tends to be pretty high. Time and time again, what we’re being asked to do is generate a return stream that’s attractive in an absolute sense. But also uncorrelated, particularly during market volatility.
“I don’t think it’s unrealistic given what we’ve seen over the last five or six years, but I do think that investors are being very demanding.”
But the multi-year period of alpha will have positive consequences. “ I feel reasonably optimistic that in 2025 we’re going to see the interest more strongly translate as well into flows.”
Industry benchmarks
Quigley and Caplis discussed the importance of accurate industry benchmarking.
Allocators making decisions based on numbers which understate hedge fund performance could under-allocate as a result and miss out on future uncorrelated return streams.
“Alpha is an incredibly important, invaluable dimension here, in that if you see alpha in a return stream, it’s indicative of skill,” says Quigley. “ These are the performance numbers that can be completely additive to your overall portfolio and very meaningful.”
He is positive about hedge fund opportunities in a year which has begun with the inauguration of President Trump and is expected to see turbulence in markets, macroeconomics and geopolitics.
He notes the difference in approach taken by bearish macro managers “who are worried or more focused on fiscal issues and perhaps underpriced inflation” and more fundamentally-oriented stock-pickers and event-driven managers, who are bullish on lower taxes, deregulation and greater deal-making activity.
“It’ll just be very interesting to see how the year plays out and which one of those views or perhaps both of them ends up ultimately being right… It highlights the need in any portfolio to have diversity of strategy and diversity of views to help ensure a good outcome.”