If asked to pick a word to describe investor sentiment in 2017, many would choose ‘confident.’ The rising stock market, the growth of cryptocurrency and the sale of a (damaged) Leonardo Da Vinci painting for $450M, all serve to highlight the collective belief that the 2008 crash is now in our rear-view mirror, and that the economy is back on sure footing.

This confidence has afforded a boost to several investment strategies, chief among them the hedge fund industry. According to eVestment, the average hedge fund gained +8.8% during the calendar year 2017. While this lagged the S&P500 at +19% and the NASDAQ at +28%, it remains the best return for the industry in several years. Compared to the net withdrawal of $106B in hedge fund assets during 2016, hedge fund assets grew $188B in 2017 (data from Eurekahedge). Exactly half of this stemmed from inflows and the other half from performance gains. Market neutral and event-driven strategies did best. Over 80% of hedge fund managers posted positive returns in 2017, the highest proportion since 2013. This provides welcome news for an industry that has suffered some major setbacks in recent years, and whose recent press coverage has concentrated on fund closures and the growth of passive management.

With the boost in performance came an uptick in compensation expectations. In a Q4 Odyssey survey of investment professionals, hedge fund investment professionals predicted that 2017 year-end bonuses would be over 30% higher than the previous year, and private equity professionals expected a 10% rise. Yet, these expectations may not have taken into account high water marks and fee compression. New fund launches in 2017 had an average performance fee of 17.11% and management fee of 1.26%, well down from the traditional 2 & 20. While it is still too early to draw official conclusions on year-end compensation (be on the lookout for our Q2 newsletter, which will feature a year-end 2017 bonus analysis), we’ve spoken with several funds, investors and allocators, and can unofficially surmise that 2017 comp did rise year-on-year, but only modestly (5-15%). This would be well under general analyst expectations (as Odyssey predicted – see coverage in Bloomberg, Dec 2017).

Private equity, meanwhile, seems to be going from strength to strength and 2017 saw record fund launches. According to Citi Business Advisory, the years 2014 to the first half of 2017 saw $2.7T flow into alternative investments, 43% of which flowed into traditional LBO private equity, 35% into infrastructure/real assets, 12% into private debt and just 2% into hedge funds (though that still represents $53B). We also saw in 2017 a boom in more esoteric private investments (an article on this topic starts on page 5 in this Newsletter). Private credit/direct lending continued its rise.

In terms of hiring, strong juniors from investment banking programs were in greater demand than ever in 2017, as investment managers competed with tech firms, VC/growth firms and each other for access to top-tier talent. The on-cycle process, which initiates earlier and earlier every single year, actually began so early that it was over by the December holidays (to clarify: this means that summer 2017 college graduates who started on banking desks in August/September 2017, interviewed and were given offers to start in buy-side roles for the summer of 2019!). Specialists (Healthcare, TMT, Energy, Financials) remain in high demand, and outside of the core investment roles, most buy-side firms seem to be searching for data scientists and client service professionals with banking and investment experience.

We often hear the phrase, “There’s no shortage of people applying for jobs, but good people are hard to find.” The WSJ noted that US unemployment stood at 4.1% by year-end, the lowest December figure since 2000. If world recovery continues apace (The World Bank predicts global growth of 3% in 2018), then demand for new hires will continue to be robust.

There’s no shortage of people applying for jobs, but good people are hard to find.

Though nothing is inevitable. Geopolitical events could certainly throw the world economy off track. We’re one press of a button (big or small) from a cataclysmic event. Given the potential for global calamity, inflation, rising rates and cryptocurrency bubbles popping are less dramatic headwinds to be concerned about, though remain risk factors. Ending the year, we saw a big uptick in distressed credit searches – apparently some investors are planning for an end to this bull run. However at this very moment, at least, those headwinds aren’t strong enough to shake the foundation of early 2018’s economic temperament: investor confidence.

The Increasing Significance of the Fund Marketing Function

Marketing is currently under the spotlight. Given the generally positive fund returns of 2017, along with added pressures on fees and assets, funds are turning to their marketing functions to maintain and grow their assets. With this in mind, we took the pulse of a number of leading hedge fund and private equity marketing and IR professionals about the key trends in marketing in 2018.

Below are the core themes we encountered:

1) Increased Customization – Clients are demanding more and customization is the new name of the game. One Marketing head put it simply, “The power has basically shifted – before LPs needed access to the best GPs; now GPs need the support of the best LPs.” As a result, there’s an increased need to cultivate a real partnership with clients, which manifests in bespoke solutions like SMAs and “fund of one” mandates. It takes more technical and consultative sales people with a knowledge of structuring to handle the increased array of wrappers that financial products now come in (UCITS, 40 Act, etc.) The client needs to feel understood and catered to more than ever.

The power has basically shifted – before LPs needed access to the best GPs; now GPs need the support of the best LPs.

2) Increased Complexity – As demands have increased, investment product complexity has increased in parallel. LP accounts can consist of fund and direct investments, and co-investments. Many funds have experienced a blurring of asset classes between private/public, equity/credit, long/short and long only. Speaking to drivers of long/short equity performance is one thing, but doing so for litigation finance or royalty investing requires a new degree of sophistication. The current expectation is that complicated questions are not to be deferred to the PM or CFO – and this is happening as funds are being pressured to be even more responsive and transparent. As one senior marketer told us, “Being able to think strategically across multiple asset classes or functions should continue to be valued more as the world continues to blur between fund investments, co-investments and one-off opportunities.”