A “paradigm shift” is taking place in institutional investment, according to Syz Capital, which notes that investors are trimming their exposure to traditional assets such as fixed income and cash, to reinvest into alternative assets.
According to a monthly fund manager survey by Bank of America in June, allocations to bonds are currently at a three-year low. Meanwhile, risk appetites have surged with equity allocations rising to their highest level this year.
“Many institutional clients reduced their fixed income exposures and cash to reinvest in hedge funds this year,” says Cédric Vuignier, head of liquid alternative investments at Syz Capital. The Swiss private bank and asset manager, Syz Group, currently manages CHF26 billion in assets.
Vuignier continues: “This trend to increase exposure to alternatives represents something of a paradigm shift. With equity markets at new highs, low rates and the increased correlation between equities and bonds, institutional investors are attracted by hedge funds as a means to reduce equity portfolio risk.”
Hedge fund assets under management hit an all-time high of USD4.146 trillion at the end of the first quarter of 2021, according to Preqin.
Meanwhile, Moody’s has noted that a low interest rates environment has led to strong inflows into private markets. The ratings agency’s report shows aggregate first-quarter fundraising for the four largest publicly-traded alternative asset managers surged to USD67.3 billion in the first quarter of 2021, 22 per cent higher than the same period last year.
Vuignier notes that the environment looks positive for hedge funds in terms of performance, as well as asset-raising.
He sees a “window of opportunity” for hedge funds with event-driven strategies targeting, in particular those targeting Japan.
“Event-driven strategies are especially benefitting from narrowing spreads as vaccination campaigns and the US elections, together with persistently low interest rates have reduced uncertainty over the past six or so months,” says Vuignier.
“Moreover, the accumulation of cash by companies during the 2020 crisis, in some sectors reaching record levels, in addition to margin pressures due to the accelerating disruptions of technology, will all create an exceptional year for corporate activity,” he says.
In particular, ongoing corporate governance reforms in Japan are spelling a brighter outlook for investment in the country.
“For many years, the Japanese market has been undervalued as it was difficult to generate outperformance,” notes Vuignier. “That has changed rapidly, driven by the corporate governance reforms set in motion by former Prime Minister Shinzo Abe.”
Japanese companies have often been accused by foreign investors of being as unresponsive to shareholders and need to improve governance.
Corporate practices in Japan have also drawn international criticism. Recently, it emerged that tech conglomerate Toshiba colluded with government officials to lean on foreign investors in a crucial vote to re-elect its board last year.
However, a new corporate governance code is now encouraging independence and diversity on company boards, as well as a greater emphasis on sustainability.
“Designed to improve profitability and the shareholder visibility in much corporate activity, the reforms are also improving returns on investment as well as investor protections. Simply put, the changes are putting corporate boards and managements under pressure to perform, which can only be beneficial for foreign investors. A recent new draft of the corporate governance code will certainly amplify this pressure,” says Vuignier.
Global activist funds such as Elliott Management, Third Point, and ValueAct have been drawn to Japan by the ongoing reforms, and Reuters finds that the number of activist funds operating in the country has more than doubled in three years.
In addition, Syz Capital also sees a bright outlook for convertible arbitrage, with new issuance from high-quality growth companies with high volatility at the stock level, such as Twitter or Peloton.
“After a strong start to the year, we have recently seen a repricing due to excessive levels of new issuance and a reduction in volatility. That offers a perfect entry point to benefit from this uncorrelated strategy,” says Vuignier.
