Prospects for the hedge fund industry a year after the COVID-19 outbreak are strong given good performance, the first positive flows since 2018 and plenty of market dislocation providing opportunities for alpha production.
"2021 is shaping up to be a very good environment for hedge funds as managers focus more on fundamentals," said John F. Frede, managing director and head of research at 50 South Capital Advisors LLC, a Chicago-based alternatives funds-of-funds manager.
"Portfolio managers of long/short equity hedge fund strategies, for example, are taking advantage of market disruption and dislocation. It's really a very good environment for stock pickers," Mr. Frede said.
50 South Capital had a total of $10.5 billion in assets as of Dec. 31, with $6.9 billion of assets under management and the balance in assets under advisement.
Sources said the outlook for the hedge fund industry this year remains positive despite plenty of headline risk and general skepticism resulting from the market turmoil caused by retail trading in stocks like GameStop Corp. in January and high losses incurred in March by family office Archegos Capital Management LP. Archegos' losses have broadly been labeled as hedge fund problems.
A hedge fund consultant who asked not to be named referred to both incidents as "a flash in the pan," noting that they were painful but short-lived and markets quickly recovered.
"These were good reminders that everybody needs to be cognizant of leverage, risk concentration and illiquidity," the consultant said.
Like other hedge fund and hedge funds-of-funds managers, 50 South Capital is seeing net inflows from both new and existing clients, as are AQR Capital Management LLC, Greenwich, Conn.; Capstone Investment Advisors LLC, New York; and Man Group PLC, London, the firms said.
Regarding asset owners' current and future hedge fund allocations, "the question institutional investors are asking is 'did hedge funds do what they are supposed to do and mitigate risk when the equity market was down 20% in the first quarter last year?' The answer is yes," said Daniel Stern, a senior managing director at alternatives consultant Cliffwater LLC.
In contrast, Cliffwater clients' hedge fund portfolios were down 4% to 5% in the tumultuous first quarter of 2020, Mr. Stern said.
He added that "hedge fund alpha (production) has been very strong since April last year and continues in 2021. We think alpha will be persistent for several years."