The hedge fund landscape experiences continuous transformations, due to shifts in underlying strategies, the assets considered and the constant creation of new funds. Conscious the dynamic nature of this sector, we consider hedge funds as an area worthy of investigation. Hence, we set out to explore and periodically report on the most noticeable trends in this sector.
Below is an overview of the main events that occurred in the second half of November 2023.
Top 10 positions lead hedge funds’ long portfolio returns
According to a Goldman Sachs’ report, published last week, hedge funds are concentrating most of their investment on long portfolios in their top 10 stock positions. The report analysed 735 hedge funds with about $1.6T in long equity positions and $797B in short positions and showed that average funds hold 70% of their long portfolios in their top 10 positions. The stocks on which a considerable concentration has been noted are mega-cap techs, with companies such as Meta Platforms, Microsoft, Amazon.com, and the “Magnificent Seven” tech stocks, which account for 14% of the average hedge fund long portfolio, twice their weight at the start of 2023. This year, returns for the most popular hedge fund long positions have jumped 31%, compared to the 19% rise in the benchmark S&P 500 index.
This information is based on the articles analysed and reported by ThePlatform’s analysts team: https://seekingalpha.com/news/4039145-hedge-funds-are-crowding-more-than-half-of-their-investments-in-their-top-10-positions , https://www.hedgeweek.com/crowding-hits-record-high-as-hedge-funds-weigh-in-on-magnificent-seven-bets/
Western Hedge Funds seeking strong performances tap into Middle East growth potential
Over the past few weeks, some hedge fund firms have moved from the West to the Middle East, with a particular attention toward the United Arab Emirates. The reason why the UAE constitute an attractive destination for Western hedge funds is the ambition to achieve the same positive results and to experience the same strong performances obtained by Middle East hedge funds this year. Today, this market counts approximately 500 already operating big name hedge fund firms, and dozens more that are seeking regulatory approval to set up business there. Here below we have reported two examples.
TCI Fund Management Limited, the $60bn London-headquartered hedge fund firm, has established a presence in the UAE where Bronwyn Owen, Director of TCI, will open and head up the new office in Abu Dhabi.
As Owen claimed, the Middle East may provide to TCI access to valuable markets for the investment management industry, in terms of a talent and asset growth perspective, as it is a market where capabilities and expertise constantly grow. In addition, the in-person presence may constitute an opportunity to build relationships with the local community in order to create their team and reach a broader investor base.
Similarly, Prosperity Capital Management, a hedge fund focused on investments in Russian equities, is shifting its operations from London to Abu Dhabi. The co-founder and chief executive, Mattias Westman, said in an interview that the economic and political fallout resulting from Brexit have made real his intention to leave the UK, considered increasingly uncooperative, and to move to Abu-Dhabi because it’s a more “friendly” environment. The winding up of the London office is expected to be completed by the end of this year, in the meanwhile a new office in France will be responsible of Prosperity’s European marketing.
This information is based on the articles analysed and reported by ThePlatform’s analysts team: https://www.hedgeweek.com/prosperity-capital-relocating-from-london-to-abu-dhabi/, https://www.hedgeweek.com/tci-fund-management-opens-abu-dhabi-office/ , https://www.hedgeweek.com/middle-east-hedge-funds-see-strong-performance-in-2023/
BNP Paribas to acquire HSBC’s hedge fund admin business
BNP Paribas’ Securities Services business has signed an agreement (expected to complete by the end of 2024) to acquire HSBC’s hedge fund administration business in different markets, including Hong Kong, Singapore, Ireland, and Luxembourg. The transfer of services is designed to strengthen BNP Paribas’ position in the liquid alternatives and hedge funds sector, and it is fully in line with the company’s integrated bank approach, which enables the bank’s clients to benefit from a full suite of front-to-back liquid alternative and hedge fund outsourcing solutions. The transition of services from HSBC to BNP Paribas will be extended to 25 clients globally, involving the integration of certain employees into BNP Paribas’ expert teams. This integration provides an opportunity to strengthen its position, contributing to the long-term growth and success of the bank and fostering sustainable partnerships.
This information is based on the article analysed and reported by ThePlatform’s analysts team: https://www.hedgeweek.com/bnp-paribas-to-acquire-hsbcs-hedge-fund-admin-business/
Hedge funds take the place of Central banks in European bond markets
According to a Reuters’ report, Hedge funds are emerging as significant players in boosting liquidity within European government bond markets, helping to fill a void created because of a reduction of bond buying and selling activities by central banks, including the European Central Bank and the Bank of England.
As said also by Thomas Weinberg, Head of Trading and Issuance at Germany’s debt management agency, due to the rise of their buying activities, hedge funds have replaced or even surpassed ECB in the fixed income market. Weinberg further revealed that hedge funds now constitute about 40% of the turnover in German securities.
This information is based on the article analysed and reported by ThePlatform’s analysts team: https://www.hedgeweek.com/hedge-funds-help-fill-central-bank-bond-buying-gap/
Is a hedge fund anything without its founder?
At the end of this month, we can say for sure that turning a hedge fund into a sustainable, growing business is a daunting task. This has been demonstrated by the high number of well-known hedge fund managers, that had to sell up or give cash back to investors to liquidate portfolios, not without challenges. Building a business that can attract new assets through its own brand strength or aspiring to become an industry leader requires special strategies and the success usually constitutes an exception. In addition, building a global client base becomes harder if the founder’s strategy faces setbacks. And expanding distribution beyond London for a firm can be challenging, especially without relying on external third parties.
Some credit strategies (like collateralized loan obligations) require equity capital, so the integration of a bigger partner seems a convenient choice in this case, like BlueBay Asset Management, that successfully sold itself to Royal Bank of Canada, and Marshall Wace LLP, which achieved independent growth acquiring the US firm KKR & Co. as its shareholder.
In light of this, reinventing or selling the business emerges as a concrete alternative. Changes started with the unexpected acquisition of Michael Hintze’s CQS by Canada’s Manulife Financial Corp. Next came short-seller Jim Chanos’s decision to return capital as a consequence of the last 15 years’ bad performances of managed assets (from $8 billion to $200 million).
While there is a lot of examples of bad succession management, such as that of Echo Street Capital Management, Jim Chanos’s decision to return the capital and Manulife’s purchase of CQS are seen as strategic moves.
Despite these choices, the successes of both managers stand out and will be remined. On one hand, there is Jim Chanos, who, after gaining widespread recognition for his successful short selling of Enron inspiring a generation of investors and analysts to unveil fraud, acknowledged that short funds assure substantial returns also in challenging markets. However, the long-term performance did not sufficiently convince investors to maintain defences against market downturns. The decline in managed assets impacted fee income, leading Chanos’s firm to have to be reinvented and become a boutique that offer at a lower cost personalized advice on fundamental short ideas and portfolios. On the other hand, there is Michael Hintze. The CQS fund is one of London’s best-known hedge funds as a credit-focused firm. However, it experienced losses during the pandemic, and, despite subsequent positive performance, the fund has been handed to a successor, Manulife Financial Corp. Despite Hintze was the “author” of CQS’ success, who worked hard to spearhead expansion, creating a business that was an attractive acquisition target, he is not part of its successor’s plans: Hitze will not be hired by Manulife, that wants only the CQS brand and its now-diversified credit business.
This information is based on the article analysed and reported by ThePlatform’s analysts team: https://www.bloomberg.com/opinion/articles/2023-11-27/michael-hintze-jim-chanos-greg-poole-move-on-whither-their-firms?srnd=premium-uk
Quantitative Funds’ still flock to China’s financial markets, that are opening to foreign hedge funds, providing greater legal certainty and qualified foreign investor licence
Recently, computer-driven hedge funds, specifically quantitative funds, have demonstrated a growing interest towards China’s financial markets, despite a withdrawal of foreign investors, rising US-China tensions and increased regulatory scrutiny.
China’s CSI 300 index stock index has fallen nearly 9% this year, compared with a 19% rise in the US S&P 500. Nevertheless, some European quantitative funds are attracted by Chinese market, as they seek opportunities not correlated with the US markets. Two examples are the London-based hedge fund firm Aspect, which is establishing an office in Shanghai, having obtained a qualified foreign investor license for access to additional Chinese futures contracts, and the Paris-based Metori, which is planning to launch a fund for western investors exclusively trading Chinese assets, as Chinese futures are considered as a source of diversification, because of their low correlation with other markets.
This year, tensions between the US and China over trade have led some foreign investors away from the Chinese market in order to look for opportunities elsewhere. But the withdrawal of some foreign investors is considered by some quant executives as an opportunity to achieve more profit, as it reduces the competition in this market. Despite the China Securities Regulatory Commission (CSRC) has pledged to enhance oversight of quantitative and automated trading activities, some retail investors suspect that quants are profiting at their expense.
In September, the CSRC issued guidance to stock exchanges and restricted certain forms of leverage accessible to hedge funds, and at the same time local investors ask for the suspension of quant funds’ activities because of their impact on retail traders and the wider market. Despite the criticism, quant executives operating in China acknowledge the need to be sensitive to local regulators’ demands. Nevertheless, Chinese futures markets are becoming more welcoming to foreign investors, to which regulators would make additional futures and options contracts on assets available to international investors holding a so-called qualified foreign investor licence. In addition, despite recent scrutiny, regulators are becoming more accepting of foreign hedge funds, as they recognise their role in the market by providing liquidity and reducing transaction costs.
Lastly, a new futures and derivatives law standardizing rules in China’s futures markets passed last year, bringing greater legal certainty. This regulatory development has been seen by western managers operating in China as a positive signal of greater openness in the country’s financial markets. The CEO of a multibillion-dollar quantitative fund trading in China said that any new market that opens and that has capacity is hugely important to large firms eager to invest their money.
This information is based on the article analysed and reported by ThePlatform’s analysts team: Quant hedge funds bet on China despite investor exodus (ft.com)