January 2024

Hedge funds ended the year on a high, with the HFRI Fund Weighted Composite Index up 2.6% in December. The month was made for equity managers as the S&P 500 and Nasdaq rallied 4.4% and 5.5%, and the HFRI Equity Hedge Index closed up 3.6%. Event driven managers were the standout, up 4.5% to close the year up 10.7%, with the activists leading at 9.2%.

Having stuck our finger in the air, a few thoughts on the year ahead: accelerated private credit growth as existing players build their books, particularly in underrepresented markets such as Asia; multi-strategy hedge funds and their expanding pods overtaking equity long/short as the largest single strategy; and a world that suits trend followers should rates fall.

Multi-strategy hedge funds continue to receive capital as well as media ink, even amid predictions of peak pod. One stop shop diversification is by far one of the most appealing factors for allocators, because multi-strats employ a wide variety of styles, each run by distinct and separate groups or pods of specialist portfolio managers under one central operation.

By the end of 2024 the alternative investment industry is likely to have a greater degree of certainty on three fronts where recently there has been anything but: politics, interest rates and regulation. The SEC has a considerable rulemaking agenda, resulting in AIMA submitting more regulatory proposal responses in North America than in any other region in its history.

For many in the crypto investment space, 2023 felt like the running of the bulls. Those who made it through the year focused on counterparty risk management, pivoted quickly to new banking relationships, managed audits that were a learning experience for both investor and auditor, and are still trying to work out what custody means.

Family offices have become increasingly active and influential players in the global transaction market, shifting from a traditional focus on wealth preservation to a more opportunistic approach that seeks to access global markets. Start-up investments now dominate family office deal volume, accounting for 15% of all family office deals.

Fund managers in the alternative investment market face intense competition for capital and challenges in investing it effectively. Preqin data shows funds collectively raised $145.3 billion on their final closes for 2023, a 19% increase on the same period the previous year. Outsourcing back, middle and even some front office functions frees managers to drive value.

The talent wars in the hedge fund space have been fuelled by the dominance of the large multi-manager funds, with Balyasny, Millennium, Citadel and Point72 fighting for top portfolio managers and analysts around the world. The success of these funds has contributed to the closure of over 2,500 hedge funds in five years, surpassing the number of launches.

Artificial intelligence is transforming and disrupting how we do business and how we live, on the same scale as prior industrial revolutions like the steam engine and electricity. Nvidia's strength comes from the comprehensive AI ecosystem it has built, an interconnected network of products, technologies and partners, and not just from the chips.

Brand funds raised heavily in 2023 but many existing portfolios have struggled, with the higher rate environment proving a significant headwind and creating a shadow backlog of maturing investments, writes PitchBook. Third quarter exits were the second worst for US private equity in more than a decade, totalling 275 exits generating a paltry $44.1 billion.

Deal volumes were depressed in 2023, with Preqin counting 7,699 deals totalling $498.6 billion, down 19% and 33% on the previous year. Yet the year saw $669.2 billion of inflows against $666.9 billion the year before. The real difference was the number of funds taking those flows, 851 in 2023 against 1,464 in 2022, reflecting the big brand draw.

Goldman Sachs Asset Management has raised $650 million for its first life science fund, above target and one of the largest in the space. West Street Life Sciences I is managed by the GSAM Life Sciences Investing Group, which backs early and mid stage therapeutic companies with multi asset portfolios. Themes include precision medicine, cell therapy and artificial intelligence.

General Atlantic has confidentially filed for an IPO, with Financial Times sources describing it as a preliminary step that could still be a year away. The firm manages $77 billion and has been building its business units in preparation. It is in talks to purchase infrastructure manager Actis, which would add a further $12.7 billion in assets.

There are definite signs of private credit FOMO among the biggest banks, no longer content to sit on the sidelines. Morgan Stanley is one example as it looks to launch what could be a $7 billion private credit fund providing senior secured loans. Bloomberg has written that $2 billion could come from the bank and $4 to $5 billion from external LP investors.

A marker of the growing importance of private credit in capital markets was Warburg Pincus tapping Apollo for a $1 billion loan. The move circumnavigates the banks and is being used to pay down bank facilities in a $15 billion fund launched in 2018. A Bloomberg source said Warburg Pincus was determined to extend its sources of fund financing.

Private equity firms are bulking out their private wealth units as they seek untapped growth. A Bain & Company report notes that 50% of the $275 trillion to $295 trillion of global assets under management is held by individuals, with only a small proportion invested in alternatives. KKR opened a private wealth office in Zurich in December.

After the performance roller coaster at Tiger Global there should be little surprise at change at the top. Many investors are still significantly down and, according to Bloomberg, have been pushing the founder to get more involved. He has taken full charge of the private investment business, two thirds of firm assets, after Scott Shleifer stepped down from the role.

2023 saw a record number of activist campaigns, with the Lazard annual activist review showing 252 campaigns around the world. Europe and Asia Pacific hit new records, led by the UK and Japan. An interesting trend was the number of campaigns not fronted by the usual players such as Elliott and Trian, but by first timers, who accounted for more than 40% of campaigns.

Activist investors invariably generate a fair amount of heat, some justified and often not, but their cases need to stack up and be made clearly. Their analysis of management competence, balance sheet weakness or outright fraud is what they look to flag. Unlike auditors they hunt for faults rather than good housekeeping, and are often far ahead of the regulatory body.

Only a few days into the new year and the activists were already rolling up their sleeves. In the UK, gambling firm Entain announced the appointment of Ricky Sandler, founder of Eminence Capital, to its capital allocation committee, a move it hopes will appease unhappy investors. In the US the battle lines were being drawn at Disney over board seats.

Stockholm based activist investor Cevian has taken a 1.3% stake worth €1.2bn in UBS, believing the Swiss bank's value will double. Cevian has invested in various European banks and feels the UBS valuation sits below that of similar US banks and should be at least on par with Morgan Stanley. It is not seeking a board seat and is backing current management.

There has been a dearth of decent sized hedge fund launches, so it is encouraging to see former BlackRock manager David Tovey launch Covale Capital. He is joined by Shane Jackson, former Head of International Prime Brokerage and Financing at BlackRock, and by Martin Kazimir running sales. Based in London and Zurich, Covale is looking to raise $1 billion for three funds.

News that Mandara Capital has closed shows how tough these markets are for commodity funds and traders. With oil bouncing around over the past year, the bullishness at the start of the year failed to materialise. Mandara was at one point one of London's biggest market makers in crude and fuel. Pierre Andurand was down 54% through 8 December.

For crypto funds that did not wind up their business, 2023 was an exceptional year. While most failed to match the 150% return in Bitcoin, the average crypto fund returned 44% for the year to 20 December, after a 52% loss in 2022. Various niche funds saw spectacular gains, with altcoin investor Stoke Global LP up 268% through to the end of November.

With the wind firmly behind crypto, cash rich investors are looking to purchase distressed digital assets. One such is Galaxy Digital, chosen by the FTX administrators last August to sell FTX bitcoin and ether, a development that took the firm's total assets to $5.3 billion. Galaxy is actively looking to acquire the assets of other bankrupt firms in the space.

The crypto sector is holding its breath as it waits for the SEC to decide on crypto ETFs. There are currently 11 bitcoin ETFs awaiting US regulatory approval, including products from BlackRock, Grayscale Investments and Valkyrie. Coindesk has written that Cumberland DRW has been onboarding issuers and sourcing Bitcoin to be ready when orders come in from APs.

The UK and Switzerland have signed an agreement on the mutual recognition of financial services, aimed at improving supply between the two countries through mutual recognition of supervisory and regulatory frameworks. Arrangements for asset management focus on collective investment schemes and cover marketing and delegation. It takes effect once ratified by both countries.

A Private Members' Bill introduced in the House of Lords on 22 November 2023 proposed removing UK listed investment funds from the scope of UK AIFMD. It would amend AIFMR to exclude closed ended investment companies whose shares are admitted to trading on a UK recognised investment exchange, removing requirements considered duplicative given their listed status.

FinCEN has issued a final rule establishing beneficial ownership information reporting requirements for existing and newly formed corporations, limited liability companies and similar entities. CFTC registered entities are exempt from the requirement, as are pooled investment vehicles operated or advised by an SEC registered investment adviser.

Together with the National Association of Private Fund Managers and the Managed Funds Association, AIMA has filed a lawsuit in the United States Court of Appeals for the Fifth Circuit against the SEC, arguing that the Short Position Reporting and Securities Loan Reporting Rules violate the Administrative Procedure Act and are burdensome beyond their purported benefits.

The SEC announced charges against a firm, its founder and one of its representatives for running a $5.3 million Ponzi scheme involving over 160 retail investors. Since 2014 the firm claimed to invest in a Multi Currency Investment Fund backed by proprietary currency exchange, generating significant returns and never having a monthly loss, none of which the SEC alleges is true.

The SEC announced settled charges against an investment adviser for failing to maintain and enforce written policies and procedures regarding material non-public information. Since at least 2019 the adviser made a series of statements containing MNPI concerning mergers, violating its policies. It consented to a cease and desist order, censure and a $4,000,000 civil penalty.