How innovative thinkers can help future-proof hedge funds

How innovative thinkers can help future-proof hedge funds

Hedge funds were once a favorable option for investors looking for an active return, as they were less regulated than other investment vehicles. However, since the mid-nineties, investors have been wary of hedge funds and their promise of alpha generation because of consistently disappointing returns.

A survey conducted by JPMorgan Chase & Co revealed that 68 percent of institutional investors saw their hedge fund portfolio underperform in 2018. Despite this, only 13 percent reduced their fund allocation into hedge funds in 2019.[1] While most hedge funds are failing to provide excess returns, investors are still drawn to their potential for alpha generation and their contribution to a diversified investment portfolio.

One of the biggest overhauls in the industry is the movement away from the outdated ‘2 and 20’ fee structure, which many investors consider exorbitant. The model is based on a flat rate of 2% charged as a management fee and 20% as a performance fee. However, only 30% of hedge funds were reportedly using this fee structure in 2018 in an attempt to further appeal to investors.[2]

Despite the industry’s resilience, hedge funds are struggling to attract creative thinkers and managers find it difficult to identify the right talent in finance.

Hedge funds need professionals to test boundaries and compile vast amounts of data to formulate innovative market approaches and secure positive returns. Institutional investors are looking ahead to the future, with 62 percent planning to allocate funds to different hedge fund strategies in 2019, including volatility arbitrage and global macro.

We are also seeing an increased demand for candidates with experience in data science, an umbrella term that encompasses a range of responsibilities, including: data analysis, programming and machine learning. All of these skills relate to one thing: the ability to extract value from data. Clients across both agriculture and metals markets, for instance, are sweeping up talent who can develop systems to analyze data and automate strategies.

So what does this mean for the commodity hedge fund industry? Firstly, the allure of alpha returns is still attractive to institutional investors. However, in order to keep up with an evolving market and deliver those crucial positive returns, they must identify the right innovative thinkers with acute analytical skills.

With the right talent in place, commodity hedge funds can become increasingly proactive and strategic, offering more creative products to investors. While eradicating costly 2 and 20 fees is a significant first step, we believe that fresh thinking will be what it takes for hedge fund managers to convince investors that their money is in safe hands.



by Ben Davisview my profile

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