Will L/S Hedge Funds Be Around In 10 Years?
More of an opinion-based question but curious to see what people think about the outlook for hedge funds long term.
I’ve just been thinking from an outsider’s perspective, why would a pension fund or institutional investor ever give a L/S fund $$$ when they charge ridiculously higher fees relative to most MFs and all ETFs, especially when these funds have more or less underperformed broader indices?
I’m not experienced enough to talk more about it but I genuinely want to know if I’m missing something here. Will this style of L/S investing still be around a decade from now? What value does it add over most low-cost MFs and ETFs?
I'm assuming you're talking about the tiger cub, single manager style of fund.
A couple of points:
-Although MM platforms seem great for generating alpha, they are generally much worse from a junior career standpoint. This means SMs can pick and choose from the best talent on the street.
-MM platforms do have very impressive gross returns and sharpe ratios but a lot of these funds end up charging something like 4 and 40 fees to keep their system up and running (and pay PMs).
-SM funds are generally not designed to outperform indices (hence the name "hedge fund"). They may underperform in bull markets while reducing downside risk.
-Despite this, some funds do consistently outperform indices and have huge AUM as a result (Tiger, Viking, Lone Pine) although these funds are higher beta and definitely not factor neutral
-At some point, the pendulum swings too far in the direction of passive (ETFs). I know of funds that are focused almost entirely on arbitrage opportunities involving index funds. Once a company gets added to an index, there is forced buying and the price shoots up despite no fundamental changes to the underlying asset. This adds to the opportunity set that smart active managers can take advantage of (hence more alpha).
-Many of the other asset classes competing for LP money (PE, Private Credit, Infra, RE, VC, even ETFs) have ridden the coattails of a 30+ year bull market in rates and equities. If this ends due to inflation, fed policy reversal, etc, money could flow out of these asset classes and into rate agnostic L/S.
No I don't think single-manager style L/S will disappear as an investment strategy or even decrease in popularity over the next 10 years. In fact, I think more money will flow into the strategy, especially if the current macro dynamic changes. That being said, take my points with a grain of salt since I'm just a freshman in college so I don't really know what I'm talking about.
There are plenty of college freshman on this forum who dunno what they are talking about, you are NOT one of those.