The big comeback: Hedge fund managers at Milken predict industry rebound

BEVERLY HILLS, Calif. (Reuters) - Hedge funds, following an extended period of low investor confidence and unspectacular returns, are poised to be great again, according to managers at a West Coast gathering of some of the world’s largest investors.

Dawn Fitzpatrick, Chief Investment Officer, Soros Fund Management, speaks at the Milken Institute's 21st Global Conference in Beverly Hills, California, U.S. May 1, 2018. REUTERS/Lucy Nicholson

“If you define it as generating returns that aren’t commoditized, that aren’t easy, by doing things that others are constrained from doing, then $3 trillion is just way too small,” Andrew Feldstein, head of BlueMountain Capital Management LLC, said in reference to the current size of the overall hedge fund industry.

Ricky Sandler, another prominent hedge fund manager who leads $7 billion stock-focused Eminence Capital, said the opportunity to find alpha, or returns above market benchmarks, was as good as 15 or 20 years ago, a period known for double-digit investment gains.

“The opportunity is there,” Sandler said.

Dawn Fitzpatrick, chief investment officer of Soros Fund Management, the personal investment office of billionaire former hedge fund manager George Soros, was also positive on the industry and managers’ flexible approach to markets.

“As markets become more challenging, our skills will become more in favor,” Fitzpatrick said.

The comments came Tuesday on a panel at the Milken Institute Global Conference, a Wall Street-heavy event organized by financier-turned-philanthropist Michael Milken.

All the panelists predicted higher returns for hedge funds in the next few years, even if they lag the “late stage” bull market in the near term.

Hedge funds have struggled in the post-financial crisis bull market as their relatively conservative investment approach and high fees - traditionally 2 percent of assets and 20 percent of profits - have underperformed simple index funds.

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The average hedge fund, per data tracker Hedge Fund Research Inc, gained 6.6 percent in 2017 when weighted by assets, compared to a 21.8 percent gain for the S&P 500 Index, with dividends, and a 4.2 percent gain for the Barclays Capital Government/Credit Bond Index.

This year, the average hedge fund is up about 0.6 percent versus slight declines in the same stock and bond benchmarks.

While performance has generally lagged over the last decade, industry assets are at a record high. Hedge fund capital increased by $4.5 billion in the first quarter of 2018 to a record of $3.215 trillion, per HFR.

Dmitry Balyasny, another panelist who leads multi-strategy Balyasny Asset Management LP, predicted industry consolidation.

He said that $3 trillion was “way too much” for assets of hedge funds as they are traditionally understood, focused solely on finding alpha. But Balyasny added that hedge funds could still produce “a valuable return stream” with a more flexible definition of their purpose.

The Milken event’s hedge fund managers acknowledged that the industry was in evolution with declining fees and increasing specialization.

Fitzpatrick said that Soros had worked to outsource certain investment opportunities given its relative lack of expertise, such as giving money to niche managers who focus on China and biotechnology.

Feldstein said that BlueMountain, which manages approximately $21 billion and is best known for credit-focused bets, has been building its capabilities in its quantitative investing, a hot hedge fund strategy that uses vast amounts of data and computer algorithms to inform market bets.

Sandler said that Eminence was also working to improve its use of quantitative science to inform stock bets and adding to its capability to short, or bet against, stocks.

“We’ve realized the world has changed and we have to keep building and evolving our firms,” Sandler said.

Reporting by Lawrence Delevingne; Editing by Jennifer Ablan and Phil Berlowitz