The Private Markets Come Calling

• Hedge Funds
• Insights
• Prime Brokers

With returns proving elusive and capital raising much harder than it used to be, hedge funds are starting to diversify their strategies, by moving into illiquid asset classes, such as credit and private equity. These changes have implications for prime brokers, as Linear Investments explains:

Hedge funds change course

Challenging performance conditions, sparked by rising inflation, rate hikes, deteriorating equity markets and a weakening global economy, have hit hedge funds hard, and this has inevitably had a knock-on impact on hedge fund capital raising.

Although Preqin anticipates AuM (assets under management) controlled by alternatives will increase from $9.3 trillion to $18.3 trillion by the end of 2027, it noted growth in terms of hedge fund AuM would be slow in comparison to recent years (11.9% annually between 2021-2027, from 14.9% between 2015-2021), although Prequin explained that “investor demand remains strong as investors continue to seek alternative sources of returns in an uncertain economic environment.”

By transitioning into private markets, hedge funds can insulate themselves against tough macro headwinds, and attract a wider cohort of investors. This is a serious option, if they are to remain competitive moving forward in today’s volatile markets.

How primes can help

As costs continue to rise, hedge funds are looking for ways to streamline the number of service providers they use, and prime brokerage is no exception. Linear Investments is aware of this challenge, and looks for ways to support our clients with their onward business transactions.

In some cases, we are seeing prime brokers refer hybrid hedge fund clients to debt financing teams within their own organisations, allowing managers to consolidate relationships, instead of seeking out new ones.

We are seeing small to mid-sized allocators such as family offices responsible for boosting private, public equity allocations in 2023 (according to Prequin more than 40% of family offices set to boost allocations in 2023). This is backed up by Preqin who “…expects growing retail investor interest in private investments – especially among high-net-worth investors – to be one of the key drivers of private markets growth in the future, particularly as a higher portion of institutional investors are approaching their current target allocation to alternative assets and may be forced to revise their target based on market conditions.”

Bain & Co highlighted retail investors are an untapped opportunity for alternatives. It stressed that retail investors, such as HNWIs and mass affluent allocators, account for just 16% of alternatives’ AuM, yet comprise 50% of the $275 trillion to $295 trillion in global AuM.

This is an investor target market, which simply cannot be ignored. By helping hybrid managers attract non-traditional sources of funding through ultra-personalised cap intro services, Linear can play an invaluable role in supporting the industry’s future success.