May 2024

April was a tougher hill to climb for many hedge managers as Middle Eastern tensions ratcheted up and the path for the Fed looked less clearcut. The HFRI Fund Weighted Composite fell 0.6% while the Asset Weighted Composite rose 0.9%, showing large funds outperforming. Macro led at 1.5%, with Equity Hedge down 1.6%.

The clear fundraising path for the alts industry was lined with institutional investors, but that has changed over the past year. High-net-worth individuals have only about 2 percent allocated to private markets according to Hamilton Lane, and lifting that to 3 percent would add another $580 billion of AUM to private markets.

Financial services organisations have turned their attention to tokenization, which involves creating a unique digital representation of a real asset and recording it on a blockchain. Because it provides an immutable record of ownership it can alleviate the administrative burden of private fund investing, and could induce a secondary market with implied liquidity.

Tokenization is the application of smart contracts to securities, commodities, real estate and other asset classes, and is useful when it either decreases the cost of using an asset or increases its productivity. It does more harm than good where courts do not recognise smart contracts, leaving conventional paperwork in place and costs higher.

Decentralized finance is shaking up the financial landscape, with the rise of real world assets on the blockchain evidenced by launches such as the BUIDL fund at BlackRock. The real catalyst for growth is the ability to translate DeFi activity so that it can be relied upon by investors, which is hard because DeFi is bespoke and complex.

The alternative investment fund landscape is undergoing significant transformation as individual investors seek access to non-traditional asset classes, a trend known as retailisation. One of the key enablers is tokenisation, which can improve transferability and liquidity and lower administrative costs, though regulatory uncertainty remains.

Hellman & Friedman has announced the close of Hellman & Friedman Capital Partners XI at $22 billion, short of the $24 billion target for the fund. Separately the firm has raised a further $2.1 billion for a secondary fund, taking total fundraising for these funds north of $24 billion.

Big brands see the bulk of inflows, but more specialised managers are also raising significant funds. Silver Lake has raised $20.5 billion for its seventh technology buyout fund, while the fourth Asia Pacific fund at KKR raised $15 billion. Golub Capital closed its sixth credit opportunities fund with $2 billion, above target.

The move by the Federal Trade Commission to ban non-compete clauses will have sizeable ramifications across alternatives markets. With so much value placed in proprietary strategies, private equity and hedge managers will fight to keep bad leavers out of the market, as seen at Jane Street in its fight with Millennium.

First quarter results at Blackstone came in marginally ahead of forecasts, with assets under management now standing at $1.06 trillion, bolstered by quarterly inflows of $34 billion and up 7% year on year. Credit and insurance led the way, returning 17.2% gross over one year. Dry powder stands at $191 billion.

In the first quarter Apollo Global Management originated a record $40 billion of private credit, matching the inflows for the quarter. The firm reported solid fundraising in its Global Wealth business with increased contributions from semi-liquid products. Total assets now stand at $671 billion, up $140 billion over 12 months.

Speaking to the Financial Times, Blackstone president Jonathan Gray said how difficult it has been to sell assets recently, but that the firm is now seeing more transaction activity. The private equity sector sits on a record $3 trillion of unsold assets. The April US IPO market had its biggest month since September last year.

KKR has made a point of integrating sustainability into its investment process and has hired Ben van Beurden, former chief executive of Shell, to advise on green investments. He told the Financial Times that KKR could invest in vehicle electrification, hydrogen and battery technology. The infrastructure unit has put $15 billion into energy transition.

Shares in CVC flew on their first day of trading on Euronext Amsterdam, trading at €17.34 and up 24% on the €14 offer price, a valuable shot in the arm for the European IPO market. The offering was oversubscribed multiple times and gives CVC an additional €250 million of capital. Other firms are watching closely.

First quarter results at Man Group showed the firm on track to hit the $200 billion marker, driven by performance. Assets grew to $175.7 billion from $167.5 billion, with investment performance adding $9.8 billion, of which $4.5 billion came from the alternatives business. The one negative was net flows, down $1.6 billion.

The poor state of UK rivers has become a concern for hedge funds, though for opportunity rather than environmental reasons. Millennium Management and Arrowstreet have recently gone short UK water companies, following CPPIB shorting Severn Trent and United Utilities last year. Elliott has been buying bonds in Thames Water.

The legal spat between Jane Street Capital and Millennium Management continues, with Jane Street failing to gain a restraining order. The case concerns an international options trading strategy that Jane Street believes was stolen after two employees left in February. Filings have been heavily redacted.

Bloomberg reported that Element Capital Management, the New York hedge fund run by Teff Talpins, is returning $4 billion to investors as it resizes to a more manageable level following poor returns. Controversially this is not a case of returning money to everyone, with smaller investors redeemed while larger ones stay in.

Another Bloomberg scoop was Antara Capital side-pocketing certain illiquid assets after piling on losses. The Blackstone-backed fund, which manages around $1.2 billion, has reported two years of losses after gains of 58% in 2020 and 23.4% in 2021. It would have been positive in 2023 but for the drag of illiquid holdings.

Investment firms are continuing to build out alternative private wealth products and teams. Neuberger Berman has launched a semi-liquid fund, NB Global Private Equity Access, with a minimum subscription of €10,000, while Coutts has partnered with JPMorgan Asset Management on a liquid alternatives fund.

Following in the footsteps of Blackstone, Citadel is doubling down on London. Already the largest office in Europe for the firm, it has agreed to dramatically increase its footprint by up to two-thirds with a new development in Broadgate, set for completion in 2027. Ken Griffin has been clear that he does not believe in the hybrid office.

Elliott has built a 2.6% position in UK listed miner Anglo American worth around $1 billion, following the BHP bid that was rejected as opportunistic and undervaluing the miner. Investors are looking for clarification on the plans of the firm, waiting for an increased bid from BHP or interest from Rio Tinto or Glencore.

Crypto is one of the most active investment spaces today, partly driven by extraordinary returns. Hedge Fund Research put crypto strategies up 47.9% in the first quarter, taking the trailing six-month return to 10.9%. Hong Kong has followed the US with the first Asian bitcoin and ether ETFs, and established managers are building teams.

On 10 April 2024 the FCA published its long awaited proposal for reforming the UK investment research regime, introducing a third option for consumption of research. For the first time since 2017 UK firms will have the option to bundle research and execution costs, subject to guardrail requirements. Responses are due by 5 June 2024.

On 23 April 2024 the FCA published Consultation Paper CP24/8, proposing to extend the Sustainability Disclosure Requirements regime to portfolio management. The extension would apply to FCA authorised firms where the activity takes place in the UK and the client is UK based. The anti-greenwashing rule takes effect on 31 May 2024.

The FCA has publicised common errors it encounters where an asset manager applies for authorisation. These include senior management lacking experience and qualifications, offices located outside the UK, business models exposing clients to risk, underestimating accountability when outsourcing, and failing to identify conflicts of interest.

Financial industry regulators face the challenge of monitoring off-channel communications, exchanges outside firm approved media that can include private emails, messaging apps and social media posts. The SEC and CFTC have ramped up enforcement, with firms expected to retain all firm-related electronic communications.

The SEC Division of Examinations has issued a Risk Alert on adviser compliance with the amended Marketing Rule. Staff observed failures in policies and their implementation, including general descriptions, informal policies not in writing and policies not tailored to specific advertisements, alongside books and records deficiencies.

The SEC announced settled charges against five registered investment advisers for Marketing Rule violations, resulting in $200,000 in penalties. All maintained public websites using hypothetical performance without policies ensuring it matched the objectives of intended audiences. GeaSphere was fined $100,000 for multiple infractions.

The SEC announced settled charges against Senvest Management for failing to preserve electronic communications and enforce its code of ethics, the first enforcement in this area against a standalone private fund adviser with no ties to a broker-dealer. From 2019 to 2021 employees used personal messaging apps for business.

On 5 April 2024 a jury sided with the SEC in SEC v. Panuwat, a case involving shadow trading. Matthew Panuwat worked at Medivation and, within seven minutes of learning it was to be acquired by Pfizer, purchased short-term call options in Incyte, a similar oncology company, making a $120,000 profit.