Tuesday, January 31, 2023

Patrick Ghali on hedge fund performance: 5 takeaways

Patrick Ghali is managing partner of global hedge fund advisory firm, Sussex Partners, advising institutions and other investors on their hedge fund allocations.

Ghali joined Alternative Fund Insight in episode three of the AFI podcast to gave his take on the debate over this year’s hedge fund performance and reveal current investor sentiment towards the sector.

  1. Long/short “probably should have performed better”

Hedge fund performance losses have attracted investor scrutiny and much bad press this year, driven by declines in long/short equity and other stock-based strategies. Long/short managers, after years of gains on technology stocks, have not been good enough at adjusting their portfolios amid the volatility, according to Ghali.

But he does not have a negative view on hedge fund performance in general this year. “There are plenty of other managers who have had a good year and proven their worth.”

2. “It is a pretty good year for hedge funds”

The industry had a partial comeback in July, the best month for hedge funds in 15 months, according to Hedge Fund Research. The typical fund made 1.7% in what was widely perceived as a bear market rally, but the industry still remains down 4.1% year-to-date, according to HFR’s main weighted index.

But a lot of that was beta-driven as US equity markets rebounded from their worst start to a year in half a century. The strong performance highlighted by Ghali was in macro and CTA strategies during H1, offering a diversified return stream and gains to investors when it mattered most.

3. Investor interest rises

That diversification means the institutions and other investors Ghali speaks to are increasing their interest in hedge funds this year. “From an investor standpoint we see more interest this year than we have in a while because people are looking for that diversification in their portfolio and hedge funds have been able to offer that.”

That said, the data has not yet caught up with the sentiment. Hedge funds pulled $27.5bn from hedge funds in Q2, according to HFR the most since the first quarter of 2020 at the beginning of the global pandemic.

4. Not the end for ESG

Ghali is a long-term proponent of sustainable investing and does not see the European energy shock and other developments this year as knocking the “long-term mega-trend” off course. The problem in hedge fund terms, he says, is beta. Many funds trying to build ESG into their portfolios are too exposed to equity market risk. It is early days from the typical hedge fund investors’ perspective. “In terms of investor demand, there isn’t that much.”

5. Launches face tough environment

As Ghali notes, “it has always been tough for small managers.” But that is especially the case during the current volatility as investors look for the perceived safety of scale, with larger managers, particularly in multi-strat, hoovering up the biggest allocations.  Emerging funds “need to be able to offer investors something different” and increase capacity in hard-to-access strategies, where the current batch of managers is small and/or closed to new commitments. He highlights Asian multi-strategy as an example.