Key Trends in Investment - Essay Example

Hedge Funds Introduction In a report published by Citi Investor Services, documents the challenges that will be presented for hedge funds as the century moves towards greater optimization. In the investment jargon, a hedge fund is basically a private partnership between that works with almost no regulation by the United States Security and Exchange Commission. In recent years, the hedge funds have experienced a record of sky high magnitude and it is being predicted that by the year 2018, the hedge fund industry assets under management will rise by 81 percent. As institutional investors increase their usage of hedge funds and rely on the hedge fund relationship management services provided by fund managers, a significant percentage of this growth can be attributed to institutions. The findings also suggest that the retail investors are becoming an established part of the investment market. The demand for alternative mutual fund is plunging. In the year 2013, the net investor inflows were not very impressive however it is forecasted that the assets under management for these products will surge significantly by 2018. The growth in demand for the product will also help increase demand for alternative UCITS where the assets under management will increase by two times by 2018. Citi Investor Services has predicted that half of the alternative industry assets coming from publically offered funds. Hence, the bottom line of the study is that hedge fund managers’ advisories are expected to rise from $2.9 trillion in 2013 to $5.8 trillion in 2018, of which 17 percent will be managed by the retail audience (Citi Investor Services, 2014). Key Trends in Investment The report identifies that the emergence of the risk averting institutional investor as a prominent source of capital has changed the landscape of the hedge fund industry. This evolution in the investment industry is tracked by Citi Investor Services in their annual report and the trends are being analyzed so they can be understood in the broader context. Largely the changes occurring in the industry for the past five years can be summarized under three main strategic imperatives. The immediate period which followed the global financial crisis, the most critical challenge was to survive in the tough global environment. In the period between 2008 and 2009 numerous flaws in the structure were spotted. Thus, in order to ensure that the investors were allocated their fair share and that the industry had to be put back to its own two feet, this required reducing risks, ensuring better consistency between the fees and terms, and encouraging a culture of meticulous oversight. However, after the structure strengthened itself, the strategic imperatives saw a change. Now, the focus was not on surviving but on diversifying. Diversify in terms of risks and creating a more robust environment that was resilient to change. Diversification as a process involved three main themes. The first involved investor movement from singular hedge fund exposure to a more categorized approach based on greater “transparency, liquidity, and directionality” (Citi Investor Services, 2014). This meant that the exposures had to be positioned in investor portfolios such that they were now equipped with greater shock absorption capacities so that they possessed the ability to deflect any volatilities and vulnerabilities. This shift was partly due to the risk configuration of investor portfolios that had reduced the risk ration from the usual 3:2 to 1:1 during the global financial crisis. In order to reduce the impact, the shift now focused more on reducing risks by tweaking the relative positioning in the investor portfolio. According to Citi Investor Services’ analysis, the port global financial crisis represents a hedge fund assets under management high of nearly 10.2 percent in assets invested on hedge funds and mutual funds. Although hedge funds had not performed very well in 2013, these figures showed that the total institutional investments saw a plunge in the hedge funds. So what conclusions can be made from the observation? It might be safe to say that following the global financial crisis, the shift represents the increasing use of financial instruments as a tool to reduce risk in the investor portfolios. A second shift of diversification came as the categorization of investors into multiple segments, each defined by its own profile of hedge funds. This development can be seen from the divergence in the hedge fund profiles as they have been segmented into various classifications. Pension allocators, for example, can choose their own hedge funds and can allocate their capital to the managers. This segment of the target market is growing in the post global financial crisis environment and now occupies a central sport in the hedge fund market. The direct allocators have reached a threshold of $1.0 billion assets under management however the numbers have not grown beyond the $3 to $5 million range, although references made cite a large $100 million ticket size. Sovereign wealth funds and pensions managed by hedge fund managers in the post global financial crisis have focused more upon large industrial organizations. Such organizational firms have at many instances been criticized as being asset gatherers however these firms have used their size in order to create market leading platforms resilient risk and reporting of portfolio, enhanced collateral management, provided with a platform for talent trading, and so on. In short, these organizations have expanded their reach globally as they have acquired worldwide influence and dominance. An important thing to notice is that many people running such firms have now reached the stage of their lives where they are nearing their retirement. Also, many hedge funds are now operating as family offices rather than investor capitals. The focus has now gone to the next generation of individuals that will be leading the franchise organizations as portfolio managers. The older generation of workers is now exiting with huge sums of capital wealth due to a capital stake. Because they now have huge amounts of money at their hands, starting newer firms is not hard for them. These new firms are raising their own institutional threshold of nearly $1 billion. This scene in the introduction of new firms is a resemblance of the pre global financial crisis environment. The report identifies the most important of all diversification themes in the present era, the emergence of the new investor tier of retail oriented financial advisors (Citi Investor Services, 2014). These advisors work to acquire those clients who fail to or do not qualify for the accredited investor status needed for participation in private funds to publically traded funds. The rate of growth of such investors has increased beyond the forecasts made by Citi. The trends for growth in the patterns for these products are likely to mimic those between 2006 and 2014. Similar is the case with the trends for hedge funds which is mimicking the trends seen between 1990 and the next 8 years. What is interesting about the trends in hedge funds industry is that it has experienced exponential growth in 5 years and the next 5 years which is of great interest for analysis and investigation. Now, the trends in the hedge fund industry are transforming from diversification to optimization. This optimization is occurring as a process which is blurring the lines between investment and hedge funds where many of the leading financial firms that were investing into hedge funds are initiating their own asset management companies. These firms have also made platforms for project management and resilient risks. Their fund managers play an important part in providing them information which they use in order to make run factor analysis and trade overlay analysis. This allows investors to co-invest into financial securities along with their hedge funds. Such attempts help to fill the gap between market making and lending that surface as a result of loss in the proprietary trading talent. There are other methods of optimization too. Those investors, who are too small to work along with their hedge fund partners, are also seeking out to construct their portfolio. This effort focuses on the identification of opportunities to allocate outside the scope of hedge fund holdings, a fact which was also affirmed in a survey. In most cases, the investors look for opportunities to capitalize on the niche or exotic opportunities for short periods of time. The focus on beta exposure was another move towards greater optimization in the year 2013 where hedge fund managers leveraged beta classifications in their portfolio. Conclusion So, the post global financial crisis has seen a large shift from firstly survival to diversification and now to optimization. Survival mainly focused on making resilient and robust platforms, diversification introduced various classifications of investment segments, whereas optimization saw the emergence of new firms that were focused towards hedge funds and identification and effective employment of opportunities. References Citi Investor Services (2014). Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization (1st ed.). New York: Citigroup Inc. Read More