2018 was a difficult year for many asset classes, particularly during the fourth quarter. Commodities fell, global equities were down—by double-digits in some regions, and credit spreads generally widened throughout the year. Hedge funds were not immune from this market sell-off but did limit losses amid a broad market drawdown. Preliminary data indicates that hedge funds, as proxied by the HFRI Fund of Funds Composite Index, were down roughly 4% for the year.
Against this backdrop, we saw actively managed hedge fund portfolios on our platform outperform equities AND the broad hedge fund index. In some cases, they delivered positive absolute returns. Results varied and were driven by strategy allocation and manager selection decisions.
As a business, we benefited from our new initiatives, including alternative lending and alternative risk premia, both of which were introduced in the fourth quarter and helped to preserve capital. Our co-investments program, another area of emphasis for us, was also a positive for the year.
Looking ahead, we expect geopolitical and event-specific risks to remain at heightened levels for some time, and so we remain particularly constructive on the macro and relative value space. In our view, these strategies are poised to benefit from a higher volatility market regime that gives rise to more frequent and sizable market dislocations. We are also fairly sanguine on fixed income relative value because we expect a pickup in rate volatility to enhance the opportunity set for these managers.
As we’ve said before, we think the key to successful hedge fund investing today lies in an expanded view of what hedge funds can and should do. As investors, we seek to capitalize on our ability to invest across the liquidity spectrum and through an array of implementation options while maintaining a strict value-per-unit-of-fee discipline. For example, we emphasize negotiating bespoke structures that allow access to specific risk/return profiles, niche ideas and targeted high-conviction trades. Likewise, we seek to leverage our managed account platform and more liquid strategies, like risk premia, in order to take advantage at the other end of the liquidity spectrum in longer-term co-investment opportunities.
We believe the investing environment for hedge funds is fertile, and we remain very optimistic about what lies ahead.
1 Hedge Fund Research Inc., accessed on January 17, 2019
Hedge Fund Research, Inc. (HFRI) Fund of Funds Composite Index: The HFRI Fund of Funds Composite Index is an index of Fund of Funds, which invest with multiple managers through funds or managed accounts. The strategy designs a diversified portfolio of managers with the objective of significantly lowering the risk (volatility) of investing with an individual manager. The Fund of Funds manager has discretion in choosing which strategies to invest in for the portfolio. A manager may allocate funds to numerous managers within a single strategy, or with numerous managers in multiple strategies. The minimum investment in a Fund of Funds may be lower than an investment in an individual hedge fund or managed account. The investor has the advantage of diversification among managers and styles with significantly less capital than investing with separate managers. PLEASE NOTE: The HFRI Fund of Funds Index is not included in the HFRI Fund Weighted Composite Index.