Hedge fund market trends in 2022

Published on May 11, 2022 by Rathnakala Kumaragurunathan

Investors are experiencing a new set of risks in 2022 with persistent market volatility and uncertainty driven by the conflict in Ukraine, elevated inflation levels and central banks’ moves to tighten monetary policy.

The following are key market trends we expect for hedge funds through 2022.

Trend #1: Investing opportunities with inflation

Although rising inflation, which reached a 40-year high in March 2022, poses a challenge for investors, it could benefit hedge fund managers pursuing relative-value strategies as spreads widen in an inflationary environment. Given the current macro backdrop, hedge funds could also reposition portfolios to take advantage of near-term opportunities in currencies and rates.

Trend #2: Alpha over beta

High levels of stock dispersions due to market volatility create a tailwind for relative-value strategies, a key enabler for hedge funds seeking alpha returns. These strategies are among the most protective in a rising-rate environment.

Trend #3: Opportunities in ESG investing

Responsible investing continues to gain prominence in 2022, with commitments to ESG and sustainability themes. A survey conducted by Barclays noted that 22% of investors prioritise ESG when deciding which hedge funds to allocate to. Carbon neutrality, in particular, is being considered a driver of corporate performance likely to attract greater investment flows.

Trend #4: Investments in digital assets

Although most digital asset investments are from high-net-worth investors at present, institutional investors are continuing to show interest, with several large institutional players penetrating the crypto space. According to PwC’s 2021 hedge fund analysis, 21% of hedge funds surveyed have invested in digital assets. Along with increased regulatory clarity and sound operational practices, we could expect hedge funds to increase their investment in this asset class. According to a survey by EY, 31% of hedge fund managers plan to add cryptocurrency to their portfolios within the next two years.

Trend #5: Using disruption to your advantage

Investment returns are increasingly driven by companies responding to disruptive technological innovation. As a result, biotechnology is a secular theme continuing to be backed by large intuitional players, with a focus on companies engaged in genome sequencing, tech-enabled procedures and digital healthcare. A relatively new theme focuses on technology solutions around cybersecurity, which are likely to prove resilient in an inflationary world, driven by the rapid expansion of cloud computing.

Trend #6: Outsourcing hedge fund functions

Outsourcing support has become a means of mitigating rising in-house costs and increasing complexities in hedge fund operations. Acuity Knowledge Partners’ hedge fund services handle time-consuming and non-core tasks, enabling clients to optimise capacity. We have set up dedicated teams of analysts (with MBA, CFA and CA backgrounds) across equities, fixed income, private equity and data science to support hedge fund functions. These teams work as an extension of our clients’ internal teams and produce exclusive output customised to client requirements.

Today’s challenging environment is causing more market volatility than experienced at the start of the pandemic. However, hedge funds willing to pursue diverse and uncorrelated strategies are likely to find opportunities in an array of near-term market dislocations and longer-term secular trends in 2022.

References:

How Do ESG Hedge Funds Stack Up Against Their Non-ESG Counterparts? (forbes.com)

3rd-annual-pwc-elwood-aima-crypto-hedge-fund-report-(may-2021).pdf

EY Global Alternative Fund Survey uncovers how managers are transforming their approach to ESG, talent management, and new products and strategies as they position themselves for growth in an evolving market | EY – US

What’s in store for the hedge fund industry in 2022? (aima.org)

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