By Nick Evans
Nobody would claim that 2010 was a great year for hedge
funds. For most managers it was a long, hard slog. Performance
was OK exceptional in a few cases, mediocre in many and
fairly unexciting for the most part.
Asset-raising was still a struggle for all but a few
with the concentration of assets by risk-averse investors into
the brand-name managers creating an increasingly bifurcated
situation whereby a handful of top funds were able to close
again while the vast majority of smaller operations found
capital inflows very hard to come by, almost irrespective of
And there were plenty of reasons for investors to be wary
with the high level of correlation with volatile equity
markets being a persistent concern, especially in months like
May and November, and with regulatory uncertainty in Europe and
around the globe further muddying the waters in the financial
The macro outlook offered no shortage of causes for concern,
with the Eurozone sovereign debt crisis, overheating in
emerging markets and global inflationary pressures heading a
long list of macro-economic worries.
The result was a very febrile environment in all major asset
classes, marked by a constantly changing risk on, risk
off sentiment leading to market reversals that were
rapid, regular and frequently extreme.
Coming after the debacle of 2008 and the recovery of 2009,
it was another tough and unpredictable year and there
were plenty of headwinds to fight against throughout the
But it ended on a high note with good performance
across the board in December, with inflows from investors
starting to gather momentum fast in the final months of the
year and with the flow of new funds and firms also returning to
more respectable levels, although still a long way from the
And there are grounds for optimism heading into 2011, with a
strong underlying tone to markets helping to underpin the
growing sense of confidence among managers, investors and
service providers alike.
So what are likely to be the defining features of the year
ahead? Firstly, the impact of the prop trading exit from banks
which could create a whole new generation of hedge
Not all of the prop teams will end up as new standalone
hedge funds overnight, to be sure. Some will team up with other
hedge funds, private equity firms or other financial groups.
Some will move into banks asset management units. And
some will simply dissolve.
But the trend is sure to provide a welcome injection of new
blood into the hedge fund industry and for that alone,
if for very little else, the regulators in the US and the rest
of the world are to be thanked.
On the flip side, the wretched AIFMD will keep rumbling on
in Europe, with the detailed Level 2 stage of the
implementation process still requiring a considerable amount of
work, focus and close monitoring to ensure that the devil is
not let loose again in the detail.
The industry will continue its reshaping with
consolidation accelerating through mergers and acquisitions,
lift-outs of teams, strategic partnerships and the like
and with a number of potentially powerful new absolute
return investment firms looking to exploit the evolving
convergence between traditional and alternative, offshore and
And life will continue to be tough for smaller firms and
boutiques although there are already welcome signs that
some of the savvier investors are turning their attention away
from the safety-first big battalions back to the smaller funds
that form the backbone of the industry and where many of the
best investing opportunities are often to be found.
In terms of specific strategies, it is anyones guess
as to which are likely to perform best or worst in the year
ahead. But it is clear that investors are looking as much to
the micro as the macro now, with an increasingly heavy focus on
event-driven and special situations-type strategies in what is
likely to be an active marketplace for M&A and corporate
It would be an overstatement to say that hedge funds have
generally had their reputation enhanced by the crisis
although it is certainly true in a number of individual cases.
But they have come through it much better than might have been
feared and the industry enters what is likely to be
another eventful and unpredictable year in increasingly robust
We wish all our friends across the industry the very best
for a prosperous and happy 2011 and look forward to seeing how