The article below is from our BRIEFINGS newsletter of 03 December 2020
The hedge fund industry is poised to post one of its strongest years since the global financial crisis, according to Goldman Sachs’ Tony Pasquariello, global head of hedge fund coverage for the Global Markets Division, who explained the drivers behind the performance and the outlook for 2021.
Tony, can you describe how the hedge fund industry has performed this year?
Tony Pasquariello: The hedge fund community has, on net, had a very strong year, a renaissance of sorts—arguably, it’s been the best year for many funds in at least a decade. Despite a relatively lean opportunity set from 2016 to 2018 -- when market volatility was exceptionally low -- returns this year have been comparatively very strong. A number of strategies have performed well, including the directional macro funds, who were well positioned on the long side of fixed income in the first quarter, then pivoted to a pro-risk stance in equities and credit once markets started to rally into the spring and summer. Other cohorts that have performed well include multi-strategy, platform-like funds and many of the traditional fundamental long-short funds, especially those most levered to growth stocks.
How are hedge fund investors positioned going into the end of the year?
Tony Pasquariello: Hedge funds have taken on a pro-risk stance, particularly as the year has progressed. According to Goldman Sachs’ prime brokerage data, portfolio net and gross exposures are both elevated on a historical basis, with a tilt toward US large cap tech stocks, health care and media stocks. On the back of positive vaccine developments, we have also seen managers moving more chips into the cyclical or value buckets by adding US industrials, basic materials and consumer discretionary stocks.
What are likely to be the key strategies in focus for hedge funds in 2021?
Tony Pasquariello: At a high level, there’s an expectation that 2021 will be another good year for the industry against a positive macro backdrop which, according to our Goldman Sachs Research colleagues, includes an above consensus view of around 6% global GDP growth, another 20% rally in the S&P 500 and the start of structural bull market in commodities. That said, a lot of money has already been made in fixed income this year and with central banks committed to anchoring rates at the zero bound, it’s going to be very difficult to replicate those returns in fixed income going forward. So we expect investors to turn to non-traditional strategies and managers to find returns outside of fixed income, specifically in equities, currencies, commodities. One could also expect that hedge funds will continue to add more private assets to their portfolios over coming years. Finally, interest in ESG has continued, and even accelerated, during the pandemic and we’re seeing the theme play a larger role in the asset management landscape, including hedge funds.