How COVID-19 has impacted the hedge fund industry

The COVID-19 pandemic has rocked global markets and economies, and it has changed the face of business forever. Like every other industry, the hedge fund industry has also been impacted by the coronavirus, although the impacts may not be as obvious as impacts in other industries. Here are some ways the hedge fund industry has been impacted by the COVID-19 pandemic.

Strategy Rotation

Perhaps the biggest impact on the hedge fund industry is a shift in rotations. Strategies with lower correlations to the capital markets are now in higher demand, which means CTA/ managed futures funds, market-neutral funds and arbitrage funds could see inflows. On the other hand, long/ short equity funds may see outflows. 

According to Eurekahedge, the only two strategies that are in the green for the first five months of the year were CTA/ managed futures, which was up 0.95%, and macro, which was up 0.12%. All other hedge fund strategies were down, with event-driven funds taking the biggest hit, followed by distressed debt. 

Eurekahedge also reports that the rotation into CTA/ managed futures funds continued in May as net investor flows were up the most compared to other strategies. The other strategies that saw investor inflows in May were multi-strategy funds, relative value funds, long/ short equity funds and fixed income funds. May brought a turnaround in investor flows for CTA/ managed futures funds as year to date through the end of May, the strategy had investor redemptions of $22.5 billion. 

May did bring a turnaround for the hedge fund industry, which recorded $9.3 billion in investor inflows and $7.4 billion in performance-driven gains. Year to date through the end of May, hedge funds are still down 2.53%.

Fee pressure and investor redemptions

As many hedge fund managers have struggled this year, especially in the March selloff, there is likely to be additional pressure on fees. The traditional 2% management fee and 20% performance fee structure is all but a thing of the past, as most funds are no longer able to command fees that high. 

Estimates suggest only about 25% of hedge funds are still charging 2 and 20, with most fund managers lowering their fees after the 2008 financial crisis. The COVID-19 pandemic has been the worst economic downturn since the financial crisis, so it stands to reason that fund managers will face additional pressure on the fees they charge. 

A related issue is investor redemptions. The last several years, investor redemptions have been high. Funds that have been underperforming their peers can expect to see even more redemptions during and after the pandemic. Some hedge funds may end up closing their doors entirely. Hedge Fund Research found that more than 300 hedge funds were liquidated during the first quarter. That number is likely to increase for the second quarter. 

More opportunities

Many hedge fund managers have been hoping for an increase in volatility for a while, and this year, their wish was granted. Unfortunately, that has meant bad things for fund managers who haven't been able to take advantage of the increased volatility. 

However, some fund managers have managed to make the most of the volatility so far, and a few even managed to protect their investors from the steep selloff in March. Bloomberg reports that Universa, a tail risk fund, Saba Capital, Haidar Capital, Pershing Square, Andurand, Chenavari, and Odey all managed positive returns in March despite the steep selloff. 

The markets have mostly recovered since then, but there are still some opportunities for hedge fund managers who know where to look.

About the Author

Michelle Jones was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She has experience as a writer and public relations expert for a wide variety of businesses. Michelle has been with ValueWalk since 2012 and is now our editor-in-chief. Email her at Mjones@valuewalk.com.