2016 was a year of surprises, both on and off Wall Street. From plunging oil to rising interest rates, from slumping hedge funds to surging PE, from Brexit to Trump to DOW approaching 20,000, 2016 certainly had an impact on the alternative asset classes.
Some key takeaways from the year:
- For Hedge Funds: A Year To Forget
2016 was a tough year for hedge funds. The industry saw its largest outflow of assets since 2009. Fund closures brought the total number of HFs (hedge funds) to below the 10,000 mark including notable cessations Perry Capital and Blackstone Senfina. Also, firms like Tudor and Brevan Howard reported significant lay-offs. Industry insiders point to a burgeoning trend of institutional investors eschewing the high-stakes HF game in favor of safer investment styles.
According to Eurekahedge, the average hedge fund gained a paltry 3.5% by mid-December. The HFRI Fund Weighted Composite Index rose 4.45% through the end of November, with Macro funds finding 2016 to be an especially difficult year. To put those numbers in comparison, the S&P rose 9% on the year, thanks in part to a post-Election Day bounce.
In addition to the dwindling returns, investors have begun pining for lower fee structures. As one source at an allocator told us,
1.5 and 15 has replaced 2 and 20 as the new normal.
Over the next 3-5 years, about half of all HF investors are expected to shift to other alternative investments such as real assets, private equity and long-only funds. Currently only a small percentage of hedge funds offer such products.
Despite all the doom and gloom in the hedge fund industry, there were some bright spots to keep an eye on. Clearly benefiting from the late-stage commodities rally, Distressed funds rose 19.7%, tallying their best performance since 2003. The HY Index also rose 17%, and Event-Driven funds were up 11% on what turned out to be a highly eventful year. This post-Election rally has been reflected in an interest in hiring, and here at Odyssey, we had one of our busiest Decembers on record…