Where Money Flows: Top Hedge Fund Trends In 2018

Hedge fund assets are expected to hit an all-time high in 2018, according to a new Agecroft Partners report. 

While the the industry's public image is often negative, hedge fund assets are up for five consecutive quarters — reaching a new high in 2017 — and are expected to move even higher in the new year, said Don Steinbrugge, CEO of Agecroft Partners.  

Steinbrugge, one of the best-known hedge fund experts, is the founder and CEO of Agecroft Partners, a global, award-winning hedge fund consulting and marketing firm.

“We believe hedge fund assets are going to reach an all-time high in 2018 and there will be a rotation of [the] strategies investors will be looking at," Steinbrugge told Benzinga. 

Agecroft: Strategies That Will Lose Assets

• Traditional long/short equity focused on developed markets.
• High beta fixed-income managers.

The hedge fund guru said he expects money to come out of traditional long/short equity hedge funds and funds with a lot of credit exposure, distressed debt or any fixed-income strategy.

“Over the past five years, most hedge funds focused on developed markets have not done well against the S&P 500 and a lot of people are unsatisfied with their long/short equity performance,” Steinbrugge said. 

High beta fixed-income managers are expected to face headwinds with rising interest rates and widening spreads, he said. 

“Bonds don’t do well in rising interest rate environments where spreads widen and a lot of credit instruments are tightening." 

Steinbrugge's Picks For Asset Gains 

• Quant strategies.
• Long/short Asian equities.
• Reinsurance.
• Higher turnover fixed-income. 
• Strategies that blur the line between private equity and hedge funds.

Most notably, quant strategies and Asian equities are expected to see a surge in demand, Steinbrugge said. 

“The industry has really evolved to where more and more strategies are using computers to pick securities. Right now seven of the top 11 hedge funds are quant-oriented strategies and we see continued demand in commodity trading advisors."

Asia is seeing robust demand from investors, where many firms are underweight toward the region in their portfolio. The IMF is predicting that Asia will account for two-thirds of global economic growth.

“Asian company valuations measured in P/E are usually at a significant discount to [the] U.S. and generally have higher volatility and less institutional ownership, which should ultimately benefit hedge fund managers,” Steinbrugge said.

Reinsurance Jumps After Natural Disasters? 

The last 12 months were marked by numerous devastating weather events. When investing in property insurance policies, returns are driven by premiums minus claims, and while last year saw a number of large events, the pricing on reinsurance is expected to go up.

“The interesting thing about reinsurance is the probability of a disaster event stays the same, so if pricing is going up, the expected return is going to be higher,” Steinbrugge said. 

“The reinsurance industry lost $100 billion in assets that needs to be replaced. That’s a big number.”

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