Sussex Partners

“DEMAND FOR HEDGE FUNDS IN 2022 SHOULD REMAIN ROBUST. THIS DEMAND IS DRIVEN BY THE FACT THAT MARKETS APPEAR TO BE QUITE TOPPY ON SEVERAL METRICS AND, HENCE, INVESTORS ARE CONTINUING TO LOOK FOR BETTER RISK-ADJUSTED ALTERNATIVES, PORTFOLIO DIVERSIFICATION AND SOURCES OF INDEPENDENT ALPHA.”

PATRICK GHALI

MANAGING PARTNER AND CO-FOUNDER, SUSSEX PARTNERS

Demand for hedge funds in 2022 should remain robust. This demand is driven by the fact that markets appear to be quite toppy on several metrics and, hence, investors are continuing to look for better risk-adjusted alternatives, portfolio diversification and sources of independent alpha.

Additionally, demand for fixed income alternatives should be significant given that the low yield conundrum isn’t likely to be resolved anytime soon, even if rates may increase this year, which of course may also lead to losses on existing traditional fixed income allocations.

ESG-related strategies are also expected to continue strong demand, both due to regulatory changes, and an ongoing trend towards inclusion of ESG considerations in portfolios. This can be seen across our portfolio of clients, though certainly more strongly for European clients. China and Japan will also continue to be geographies of interest, not just on a valuation basis, but specifically because Japan should continue to stimulate its economy significantly without having to worry as much about the risk of runaway inflation, this should create interesting opportunities.

With the ongoing uncertainty around Covid-19, divergent interest rate regimes, and late cycle volatility, hedge funds should provide investors with independent sources of returns and protection in case of a correction. Having an element of non-correlation/protection also allows investors to take risks in other parts of their portfolios. The biggest risk for hedge funds in 2022 will be an environment of rapid reversals and frequent regime changes, which can lead to managers getting axed.

CHAPTER SIX

NEW TRENDS