Hedge Fund Trends For 2019: Industry 'Has Finally Hit Its Saturation Point'

Hedge funds may be reaching a "saturation point," according to one industry expert.

Don Steinbrugge, managing partner of Hedge Fund advisory firm Agecroft Partners, said in his annual trend report that he expects slow growth for the industry in 2019.

The majority of growth in recent years has come from performance, with only a modest amount of new capital coming into the space, Steinbrugge said — and new capital is mostly coming from reallocations of capital redeemed from other managers, Steinbrugge says.

“A big story is that the industry has grown nine years in a row and I believe it has finally hit its saturation point," he said.

"The industry has grown from $600 billion at the turn of the century to over $3 trillion. There are not a lot more markets for hedge funds to expand their [assets under management],” Steinbrugge told Benzinga.

Industry Has Evolved Into 'Arms Race For Alpha'

The hedge fund space is becoming even more competitive, and with most of the new assets coming from competing hedge funds, it is prompting an arms race for alpha, Steinbrugge said.

“The industry has evolved into a takeaway game: assets going into hedge funds are coming from other hedge funds. I think this year you will see a lot of money shifting between strategies," he said.

The advisor expects "a lot of withdrawals" at funds with major equity and fixed-income exposure, while he predicts hedge funds with low correlations to capital markets will add assets.

SMID-Cap Strategies Favored

In Steinbrugge's view, money will also come out of strategies tied to large-cap S&P500 stocks, where the informational edge and inefficiency is minimal, and into small- and mid-cap strategies where funds can gain an edge.

He also predicts that capital will move into sector managers — particularly those tied to tech, health care and biotech.

"Tthey are industries that can do very well, and managers have a specialty advantage.”

Asia Continues To Be Overlooked

Steinbrugge maintains the stance that hedge funds are overlooking Asia, with only 3-4 percent of hedge funds investing in the continent. He notes that in 2018, the International Monetary Fund reported that two-thirds of world economic growth over the next five years will come from Asia.

“2018 saw broad-based decline in Asian markets and a reduction in the demand for Asia-focused managers. We remain sensitive to the political landscape and the potential near-term impact of trade policies by the U.S., China and other prominent global trading partners."

Agecroft believes the downward trend will reverse — "and the reversal will be one of the strongest trends over the next decade," Steinbrugge said.

Asia is retail-oriented, not institution-oriented, he said.

"You also are dealing with a region that is trading at lower valuations and a region that is growing at a faster pace than the U.S. I think you are going to see more money flow into Asia."

2018 Notable Hedge Fund Performers

• Odey European Performance: 51.52-percent gain.
• Pershing Square Holdings: 0.7-percent decline.
• Third Point Capital: 11-percent decline.
• Greenlight Capital 34-percent decline.

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