Hedge Fund Industry Trends in 2020

By Gregory Zoraian

The hedge fund industry is incredibly dynamic and fast moving, with the rise and fall of stocks sometimes altering conditions overnight. Still, general economic trends, as well as previous patterns of growth and decline, allow experts to predict some overall shifts in the industry, and it is vital for hedge fund managers and investors to understand these predicted trends to help them prepare for likely changes. Several well-known global hedge fund consulting and marketing firms release yearly industry analysis after polling thousands of hedge fund organizations and investors. Below are top hedge fund industry guidelines for 2020.

  1. Hedge Fund Assets Continue to Grow

In 2020, we expect to see overall asset growth and industry consolidation, with hedge fund assets anticipated to continue the sustainable growth they’ve shown over the last decade (despite scares and drops such as the turbulence we’ve seen from Coronavirus fears). Despite some negative predictions from economists stating a general hedge fund decline, many experts believe it is a good time to invest. Hedge fund assets are expected to increase by 3% in 2020, mainly resulting from market performance. It should be noted, however, that this growth won’t offset declining fees from reduced overall revenue.

  1. U.K. Hedge Funds will Look to U.S. and Canada

Post-Brexit, U.K. hedge fund managers are expected to turn their attention toward American and Canadian investors. The U.K. is the second largest hedge fund market in the world, but after leaving the EU they face many obstacles in dealing with Europe’s hedge fund industry regulations. As the EU was created to promote internal free trade and to put non-EU member states at a disadvantage, Britain is expected to focus more on North American investors and less on those in neighboring European countries.

  1. ESG Factors Become Increasingly Important in Investor Decisions

Originally a niche activity, the hedge fund industry is rapidly reinventing itself due to evolving, increasingly powerful technology and the fact that ESG (environmental, social and governance) factors are more and more important for potential investors when assessing a company’s future financial performance, or risk and reward. ESG factors can help investors sidestep businesses with potential future financial risk, and many brokerage firms, mutual funds and financial advisors now offer products and services that utilize ESG criteria. Over the next year, investors and managers will seek to integrate ESG criteria across investment products and it will become an increasingly common requirement in regulatory disclosure.

  1. New Technology will Change How Hedge Funds Operate

Several recent surveys of the hedge fund industry found that new statistical and computational tools, cutting-edge management software, and the increasing use of AI (artificial intelligence) in evaluating industry data will soon require hedge funds to reassess how they operate. More than ever, technology is critical to analyze the overabundance of available data as well as to comply with increasing regulation on how that data is used. Throughout the next decade, hedge fund managers are expected to implement alternative data – companies and software that collect, clean, analyze and interpret data – and start utilizing AI capabilities to inform their investment decisions.

To learn more about hedge fund trends predicted for 2020, and to learn how we can put our hedge fund expertise to work for you, please contact our team.

Risks and Rewards of Investing in Biotech Hedge Funds

By John Zoraian

In the last two decades, the U.S. biotech sector has grown to become one of the stock market’s top performing sectors. Due to its rapid growth and potential for high rate of return, there has been a recent wave of investor interest in biotechnology and biotech hedge funds. Many new investors in the biotech sector are excited for fast-growing investment funds capable of generating double- and triple-digit returns. Yet other investors remain wary, stating the high risks, potential for massive loses and the lackluster performance of the average hedge fund in current years as deciding negative factors.

So, what exactly are the risks and rewards of biotechnology-focused hedge funds, and should you be interested?

Biotechnology, broadly speaking, is any technological application that makes or modifies products or processes using biological systems. Currently, there are over 500 biotech companies in the U.S., making it the world’s hub for innovation in the biotechnology field; however, only approximately 20 of these 500 are turning a profit. This is due to the uncertain nature of the biotech sector. High overhead costs, long periods of research and testing, plus the uncertainty of final regulatory approval by the FDA (Food and Drug Administration) mean that, in terms of stock market valuations, it’s very difficult for investors to predict with any certainty which biotech companies will strike it big and which will fall by the wayside.

For the biotech industry, while politicians and the political climate have some impact on drug pricing, due to “high intra-industry variance,” biotech stock prices chiefly rise and fall based on a drug passing or failing its clinical trials. This makes the biotech sector extremely volatile and unpredictable at best for most investors and uninvestable, at worst, for others. However, therein lies the opportunity for those willing to bear the risk.

Yet some hedge fund veterans, like Joseph Edelman who founded Perceptive Advisors and its flagship hedge fund, Perceptive Life Sciences Fund, back in 1999, have struck big by specializing in small- and mid-cap biotech companies. Since inception, the fund has generated annualized gains of 30% net of fees, with an astounding 41% net gain realized in 2017. Edelman has thrived in the most volatile sector of the stock market by being highly diversified with the companies he backs; avoiding big pharmaceutical companies, insurance conglomerates and hospital chains, instead backing small companies whose fate typically hinges on a single drug passing or failing the clinical trials – a high-risk strategy that returns big rewards if successful; by maintaining risk tolerance and timing his purchase of stocks accurately between Phase 1 clinical trials and, often, Phase 3 clinical trials; and understanding the major innovations currently taking place in the biotech field.  His unique background, which includes a degree in psychology from UC, San Diego, and a father who was a professor of biochemistry and later chair of the molecular chemistry and biophysics department at Columbia University certainly helped develop his industry acumen.

Edelman says of his own strategy that careful research into the companies he selects, taken together with the ability to understand and psychologically analyze corporate events within the biotech sector, is the driving factor behind his alpha generation.

This correlates with what researchers have found when studying rate of returns within the biotech sector. It is healthcare specific hedge funds, those with background knowledge of biotech or those specifically focused on the health care and biotech sectors, which statistically have the most success in accurately predicting which drugs and companies will succeed and which will fail.

If you are interested in learning more about biotech focused hedge funds, or hedge funds in general, please contact our team.