Navigating global hedge fund trends in an uncertain 2024 environment

Key Takeaways:

• With unpredictability ahead in 2024, hedge fund investors increasingly care about manager skill and commitment over historical returns alone.
• Navigating 2024’s complexity demands flexibility in positioning, streamlined operations, and community building across the industry.
• Asia resists generalization – each economy like Australia, China, Japan and India or emerging markets such as in Southeast Asia – has nuances that call for customized approaches.
• Limited partners interpret co-investing as “skin in the game” and alignment of LP and manager interests.
• Inflation may have complex drivers beyond just interest rates. As a result, investment managers are closely tracking macro fundamentals and risks
• Geopolitical conflicts often spark short-term market volatility. However, their impact on long-term investment strategy tends to be limited. Prudent managers avoid overreacting to world events.
• As assumptions break down across economies and asset classes, adaptive strategies, cash management, and rapid execution become table stakes.
• Resilient managers balance efficiency gains from adopting new technologies with maintaining investor relationships built on trust.

Investment market conditions across the Asia-Pacific region (APAC) have complicated operations and investment strategies in 2023. As we look ahead to 2024, we find cautious optimism. At the same time, different views of individual country markets persist.

Enfusion’s annual Investment Forum, held in Sydney, Australia, recently gathered leaders from across APAC to discuss their points of view. Christy Lai, APAC Head of Partnership and Alliances, Enfusion, moderated the event. As assumptions change across economies, politics, and asset classes, their insights gauge both market sentiment and operational needs among fund managers.

Key focus areas covered included evolving investor priorities, inflation shifts, Asian market differentiation, distribution channel innovations, technology adoption, and resilience in the face of asset class unpredictability and geopolitical risks.

Though views diverged on specific markets, the need for adaptability, liquidity, and risk balancing remained consistent across our expert panel. These factors will likely set the tone as we enter a new year.

“Team, Culture, and Tech”

The current volatile environment plays an integral part in investor and manager alignment. As participants observed, limited partners (LPs) pay as much attention to manager skill and commitment as they do to historical returns. This mindset makes sense since market volatility can distort the picture of managers’ true strengths. A talented portfolio manager occasionally loses capital, but an experienced team produces long-term results.

With unpredictability ahead, expertise matters over hypotheticals. As Vincent Hua, Managing Director at AL Capital states: “Investors care most about the people and team behind a fund, not just past performance.”

In addition, the discussion highlighted the value investors place on managers’ willingness to co-invest. Co-investing demonstrates alignment and a willingness to put skin in the game. Strong leadership, trust, and transparency around underlying strategies and operations all add up to more traction in the fundraising process.

Emerging technology also shows operational promise. Blockchain and tokenization emerged as one such opportunity. For example, Harvey Kalman, Chairman at Connexian noted the progress in using tokenization to streamline investment processes. As a recent UBS Asset Management pilot in Singapore demonstrated, tokenization raises the prospect of fewer intermediaries, faster settlement, improved liquidity, and accelerated distribution. Though at an early stage, thoughtful adoption may reduce operational friction, with additional innovation expected in 2024.

However, even with technology optimism, forum discussions showed that relationships remain vital. Still, tech cannot replace human interaction. Managers need consistent engagement with LPs across economic cycles to nurture understanding and earn loyalty. Those who balance automating systems for efficiency with sustaining interpersonal fundraiser and investor partnerships will thrive.

We also believe active conversations with APAC’s broader investor and fund community can advance the industry. Given the active discussion around the table at our Sydney event, we are already looking forward to convening regional experts again toward the end of 2024.

Innovations in Fund Structures and Taxes

Innovation in investment vehicles and tax efficiency structures can further impact operations. As Eddie Pegoraro, Chief Operating Officer at Molokai Capital outlined, access to offshore investments currently can be limited. For instance, mutual funds have foreign capital restrictions, while other vehicles face tax leakage or compliance burdens through feeder structures.

However, new fund frameworks can ease these dynamics. Australian developments in insurance-linked pooled funds and investment bonds promise tax advantages for local managers while helping them attract retirement savings investments. Further innovations that reduce tax and regulatory friction could widen capital access for APAC managers.

Navigating Shifting Market Relationships

Operations, of course, occur in the context of a highly complex market in the post-COVID era. Top-of-mind issues in our Forum included inflation and interest rates, equities, and geopolitics.

Rates and Inflation Delinking

As Hua asserted, “Rates are not the main driver of current inflation in APAC.” COVID savings gluts and migration shifts also influence market direction. The impacts are especially notable in fixed-income assets. For example, the longer-term bond direction stays unclear even with central bank rate hikes. New dynamics, such as China selling treasuries, further complicate the picture, he added. In essence, the old inflation/rate relationships have become delinked. This phenomenon challenges historical positioning tied to these indicators and will likely play a part throughout 2024.

Hunting Returns While Managing Risk

Equity behavior also defies established patterns. According to Jack Ronaldson, Investment Manager at Spotlight Group, “despite substantial rate hikes, equities have continued to rise” while investors receive less compensation for the equity risk they take on. As a result, the panel suggested flexible absolute return strategies rather than traditional beta for greater resilience. In their view, investors want fund managers who avoid rigid assumptions while delivering consistent risk-adjusted performance.

Divergence Across Asian Economies

Meanwhile, geopolitical complications create divergent opportunities. China presents depressed valuations that require patient capital to unlock, per Ronaldson’s view. For Australia-based managers, “strengths in established liquid markets” with financial services stand out from manufacturing or resource-based economies, per the discussion. Further normalization of China could also fuel a prolonged upside.

Japan presents a complex picture. On the one hand, interest rates, controlled inflation, investor-friendly policies, and improved governance have created tailwinds for investors like Spotlight Group. However, demographically driven headwinds may limit economic gains, according to Hua. India offers long-term potential, though current expensive valuations give some pause. In essence, the region resists generalization, demanding a country-by-country and even a manager-by-manager view. Emerging markets such as Vietnam also remain on the radar as they experience wage and infrastructure growth.

Navigating Geopolitical Uncertainty

Geopolitical events and concerns increasingly impact economies and investment flows, whether war in Eastern Europe, Middle East conflict, or tensions in Southeast and East Asia. Still, direct exposure remains hard to predict. Though vulnerabilities exist across the region, funds must exercise caution against reactionary positioning. As Hua noted, conflicts tend to spark short-term noise more than lasting strategic shifts for investors. Avoiding knee-jerk reallocations remains key.

Ultimately, geopolitics create complications, not assumptions. Risks could reshape fundamentals if situations escalate. However, fund managers concentrating on adaptable strategies and liquid execution can best ride out external shocks. Firms that thrive in uncertainty balance resilience across portfolios, preparing them to absorb volatility when crises emerge while targeting growth when conditions improve.

In summary, funds balancing resilience and optionality will differentiate themselves. Adaptive strategies and liquidity become baseline requirements to navigate unpredictable conditions ahead.

Adaptive Optimism for 2024

Our Investment Forum highlighted an environment of complexity where reliability has become a primary focus across APAC for 2024. Uncertainty, adaptability, and liquidity have posed new challenges and inspired new solutions for resilience in strategy, execution, and operations.

This environment creates three core priorities: making operations more efficient, improving access to data, and tapping into new asset classes. Nimble adjustment as risks appear supports evolving opportunities. Streamlining flexible systems sustains alignment.

By combining adaptive positioning with low-friction implementation, firms can absorb volatility as old assumptions break down. Fluid strategies and efficient operations allow managers and investors to collaborate through community, powering performance in uncertainty.