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    3 POINT PERSPECTIVE | MACRO SHIFTS

    2023 Hedge Fund outlook: The tide has turned

    24 Feb 2023

    Despite the challenges from a bear market, Hedge Funds (HFs) delivered resilient performance in 2022. In a year when the MSCI World fell 18%, HFs captured only a fraction of the drawdown, thus offering the best downside protection since the Dotcom bubble burst. However sentiment could be softening according to our latest client survey, as some institutional investors rebalance their portfolios.

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    Navigating the M&A Market in 2023

    To learn more about the outlook for the hedge fund industry in 2023, please ask your Barclays Corporate and Investment Bank representative for the 2023 Global Hedge Fund Industry Outlook and Trends report, or contact the Strategic Consulting team.

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    At the end of each year, the Barclays Capital Solutions team gleans insights on investors’ plans for the coming year through a survey of the allocator community. While net interest in allocating to Hedge Funds decreased for the coming year, sentiment remains positive for the asset class.

    1. Three years of positive alpha

    The key reason for HFs’ relative success over the last few years has been their ability to capture less of the market’s downside than its upside, marking a striking turnaround from the previous decade.

    Additionally, 2022 marked the third straight year that HFs generated positive alpha, as well as the first year that HFs generated positive alpha in a year the MSCI was down since 2002.

    However, 2022 saw significant dispersion by HF strategy. For instance, Macro strategies (Discretionary Macro and Managed Futures) outperformed, whereas Discretionary Equity lagged.

    Source: Barclays Strategic Consulting analysis

    2. Investor sentiment still positive, but investors are rebalancing

    Investor sentiment toward HFs has softened compared to last year: primarily driven by institutional investors (e.g. pensions, endowments & foundations). Given recent outperformance, this group of investors has become overweight HFs relative to the balance of their portfolios. This phenomenon has often been referred to as the “denominator effect.”, whereby portfolios experiencing drastic declines in other assets end up with a larger percentage of their balance sheets held in HFs. As a result of strong performance in 2022, HFs have experienced net redemptions recently and may receive fewer allocations in 2023.

    Despite lower overall net interest, private investors, particularly those with less than $1 billion in HF assets under management, have indicated that they are more likely to invest in Hedge Funds in 2023 than they were in 2022.

    Across HF strategies, investors indicated that Distressed Credit, Equity Market Neutral, Global Macro, and Multi-Strategy are the most in-favour strategies for 2023.

    3. Rise of the Multi-Manager platforms continues

    Over the last 10 years, most of the HF Industry growth has gone to the largest managers. In particular, the rise of Multi-Manager (MM) platforms given their stronger performance and positive investor flows has led to superior growth, relative to the balance of the HF Industry.

    The superior performance of MM platforms continues to attract investors’ attention, even from investors that are not currently allocated to Multi-Manager platforms. ~15% of those not currently allocated to MMs have indicated plans to make allocate to MMs for the first time in 2023.

    To learn more about the outlook for the hedge fund industry in 2023, please ask your Barclays Corporate and Investment Bank representative for the 2023 Global Hedge Fund Industry Outlook and Trends report or contact the Strategic Consulting team at strategicconsulting@barclays.com.

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