September 2023

August was a tricky month for hedge funds, with Event Driven being the standout strategy and by close, the HFRX Fund Weighted Composite was down -0.5%. This was a month that saw further signs of China's slowdown, flip-flopping views on US interest rates and crypto volatility; yet markets remained relatively subdued, with the VIX sitting at 13.6, way down on its long-term average.

Secondary funds are again in the spotlight, with some big fund launches this year. From where we sit, there is particular interest from many of the large institutional investors and family offices. While the secondary market is not new, it caught the eye in the post-GFC period, when investors were looking to offload positions, many at significant discounts.

With apologies to William Shakespeare for bringing Juliet's famous soliloquy into a current American taxonomy debate, apparently a lot seems at stake in the more than multi-trillion-dollar market of ESG investments.

In the realm of secondary market investing, competition is a prevailing force. As per our estimate, dedicated secondary funds currently sit on more than $200 billion of "dry powder". As investors navigate this landscape, the search for less contested opportunities becomes a strategic pursuit.

General Partners need not fear the Secondary Market. The realm of secondary trading for illiquid alternative investments has evolved from obscurity into a well-established arena involving sophisticated, well-funded firms, some exclusively dedicated to secondaries.

Looking back over the last 12 to 18 months, it is important to realise what did not happen: Despite a sharp fall in public markets, a historic increase in interest rates driven by soaring inflation and other macro headwinds, the ongoing war in Ukraine, an energy crisis, geopolitical issues and a mini banking crisis in the US, PE valuations did not collapse.

The exponential growth in the private funds industry, now estimated to be worth over $25 trillion, is capturing the attention of governments and regulators worldwide. The UK government's recent Mansion House Reforms aim to channel private assets to fund high-growth UK businesses.

CVC Glendower has announced that it has closed its fifth secondary fundraise at $8.5 billion. This business is a strategic partnership between CVC, which manages more than $150 billion today, and Glendower, the specialist secondaries managers.

CVC has clearly been busy lately. Not content with their secondaries fund raise, they have raised €26 billion fund for their ninth Europe/ Americas private equity fund.

These markets may not be the easiest for fund raising, but there do appear to be plenty of 'record funds'. Another 'record' is at Blackstone, which has closed its fourth Tactical Opportunities Fund, amassing $5.2 billion of capital commitments.

A noteworthy fund raise comes from London-based Hayfin Capital Management's for its direct lending fund, which is now above the €6 billion target and is set to hit €7 billion by the end of the year.

Research from Statista shows Blackstone to have been the biggest private equity asset gatherer over the past five years. According to their research, Blackstone has raised $125.6 billion over the period, followed by KKR, with $103.7 billion, then EQT $101.7 billion, Thoma Bravo $74.1 billion and The Carlyle Group $69.7 billion.

CVC has acquired a majority stake in DIF Capital Partners, the Dutch-based infrastructure-focused manager, in a deal worth €1 billion. DIF manages €16 billion in infrastructure mid-market assets, broadening CVC's investment offerings and follows the 2021 acquisition of Glendower Capital.

Given the headline, you may laugh; how often have we said macro is back? On this side, we love macro and think as an investment strategy, it makes sense, but we are constantly frustrated by the false dawns.

Having agreed to be acquired by Rithm Capital Corp, the real estate and financial services asset manager, Sculptor Capital Management, the US hedge fund once called Och Ziff, has since received a revised offer from Boaz Weinstein.

Over the past month, one of the more interesting moves was a Financial Times story that Tiger Global has been building a sizeable stake in Apollo. This development comes from a mid-year investor letter and is far removed from Tiger's more usual technology focus.

US value manager Engine No. 1, which in only a few years has made a name for itself - punching well above its weight, given its relatively small size - has said that it is now looking beyond activism and into the world of private credit.

With the failure of Liontrust's £96 million bid for GAM, the Swiss manager is living very much hand to mouth. Trust is an essential asset in this space and is currently lacking at GAM.

With a decent pedigree and a strong track record can come some big assets - even in these tough fund raising conditions. Two former Citadel traders have proved this, with a $2 billion fund raise for an equity long-short fund.

Spurred on by fast-rising commodities prices, one of the most significant trends from last year was for hedge funds and investment banks to rebuild their commodity teams in the space. Unfortunately, with this side of the market somewhat subdued.

There are very few hedge funds that have a genuine philanthropic bent. But TCI is one and showed its true colours last year, when it pledged $491million to charitable activities in 2022.

A lengthy article in the Financial Times questions the future of the multi-manager hedge fund due to high fees. Behind this story is a Goldman Sachs report that found a 'slight increase' in investors looking to reduce exposure, and the SEC concerned about such funds impacting financial stability.

A few months ago, we wrote about many of the most significant funds and investment banks building out their family office arms. There is further to go on this trend, as we see and hear new family office divisions and services launching weekly. This move is partly the growth of family offices, which now total around 10,000, according to estimates.

With interest rates high, private credit continues to be where the interest lies and will be a focus for the Alternative Investor later this year. Private debt fundraising totaled $71 billion in the second quarter, according to Preqin data. There were 34 new funds, double that of the previous year.

The investment management industry has always been competitive in sourcing the best talent. But what used to be mainly about star managers and top-rated analysts has increasingly turned to tech and trading strategies. We have seen this in hedge and private equity - perhaps not surprising given the proprietary nature of many trading strategies and algorithms.

On 23 August 2023, the SEC adopted proposed rules relating to advisers of private funds. These rules impact both registered investment advisers ("RIAs") and exempt reporting advisers ("ERAs"). The SEC's stated purpose of the rules is to enhance the regulation of private fund advisers by facilitating transparency, promoting more efficient capital markets, and encouraging capital formation.

Marking the first violation of its amended Marketing Rule, the SEC on 21 August 2023 announced charges against Titan Global Capital Management USA LLC ("Titan") for using in advertisements hypothetical performance metrics that were misleading.

The CFTC on 23 August 2023 filed a civil enforcement action against Cambridge Financial Advisors, LLC ("Cambridge") and its owner Walter Dunning Larrick, III ("Larrick"). The complaint alleges that Larrick and Cambridge fraudulently induced at least 70 people to invest over $3.6 million in a purported commodity pool and then misappropriated most of the pool funds.

The SEC on 8 August 2023 announced charges against 10 firms in their capacity as broker-dealers and one dually registered broker-dealer and investment adviser, for widespread and longstanding failures to maintain and preserve electronic communications.

The SEC on 7 August 2023 announced charges against Theorem Fund Services LLC ("Theorem"), a Florida-based fund administrator, for failing to respond to red flags relating to a fraud against a private fund and its investors.

On 10 July 2023, the UK Investment Research Review was published. The Review was Chaired by Rachel Kent, a lawyer at Hogan Lovells International LLP, upon the request of the UK Chancellor, Jeremy Hunt.

Announced on 7 August, FCA Consultation, CP23/17, sets out the regulator's proposed rules to replace the firm-facing provisions from the UK Securitisation Regulation ("UK SR") which are being transferred into the Handbook.

On 23 August 2023, Morgan Stanley & Co International Plc ("MSIP") was fined £5.41m by Ofgem, Great Britain's independent energy regulator, for failing to record and retain electronic trading communications.