142. The world according to Goldman Sachs

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1:28Freddie Parker: hello and welcome back to the long short i'm your host drew nickel hedge funds have delivered another strong period of returns and we like many of you are keen to review what went well and what didn't in the world of alternative investments in order to plot our path for the rest of the year so once again we turn to one of the most clued in people in the market to help us understand the landscape today. Back by popular demand is Freddie Parker, Goldman Sachs co-head of Prime Insights and Analytics. Freddie, welcome back. Thanks for having me, Drew. You recently published your mid-year update on the hedge fund industry, which was circulated far and wide and made for very interesting reading as always.

2:09Freddie Parker: What were the key takeaways of this edition's report?

2:13The Long-Short Hosts: Yeah, so echoing, I think, your earlier comments, really the thing that stands out far and away is the strength of performance thus far this year. So really strong first half for hedge funds. We had the industry average at around 7%. Put that in broader context, if you look back at the last 10 years, the average half yearly return for hedge funds was about 4.1%. So we've seen a pretty consistently strong period for a few years now. That first half of this year really picked up where the second half of 25 left off in terms of delivering really strong performance momentum and was, I think, not just notable in terms of the quantum of returns, but the breadth of those returns.

2:55The Long-Short Hosts: So really, most strategies had a very strong start to the year. And as of the end of the first half, we're on track to outperform 2025 on a straight line basis. It was an environment of some dispersion at both the strategy and a fund level. So So at a strategy level, you had equity long short, which really was the outstanding strategy to the upside, somewhat more muted performance from some pockets of what we call the uncorrelated strategies complex. So discretionary macro, quant and so on. But nevertheless, I think taken in the round, very strong. And then a fair amount of dispersion at the fund level as well.

3:34The Long-Short Hosts: But I would say for the most part, actually, if you look at dispersion in terms of where do the quartiles fall, where the percentiles fall, the dispersion skews towards the upside, which is always good to see. And then as you look at how asset allocators are responding to that, the messaging continues to be very positive. Hedge funds, once again, the most sought after asset class. That's been the case for a couple of years now. But actually more encouraging than that is not just what allocators are saying, but how they're moving their feet. And we see not just a significant pickup in inflows year to date, but also a real broadening of those inflows.

4:09The Long-Short Hosts: So overall, the allocated behaviour seems to be very positive as well. And as we look into the second half of the year, we anticipate that continuing with hedge fund searches across strategies continuing to trend higher. And our expectation is that those inflows should continue.

4:26Freddie Parker: excellent well it's always good to hear that there is a broadly rosy picture for the hedge fund landscape out there before we dive into the details of this report it might be worth just taking a moment to join the dots from when we last spoke which was earlier in the year I think when you put out your beginning of the year report when we spoke then you made the point that the higher rates and then the greater market dispersion had created something of a new era for hedge funds if you look at it over a multi-year period now where we are today after an equally strong first half of the year ended with quite a turbulent july how has that thesis strengthened for you uh what has challenged it and and do you really feel like we are now in a a new paradigm or is this sort of a continuation of that favorable period that we spoke about before?

5:18The Long-Short Hosts: No, I think there has been a structural shift. And this is something we've been saying for some years now. We really sort of made this point early in 2022, when we started to see rates rising meaningfully for the first time in really a very long time, essentially since the global financial crisis. And I think we continue to be very much of the view that this higher rates paradigm, I mean, obviously, in the grand scheme of long run history, rates aren't particularly high, but they're clearly no longer pinned to zero, which I think is the main thing. We've seen an environment which has been, it's remained supportive of equities clearly, but at the same time within that, we've seen lower correlations between stocks, higher dispersion.

6:01The Long-Short Hosts: The one thing that stood out in the first half of this year, which we noticed in the report, is actually this divergence between index vol and single stock vol, which is to say the volatility of markets as measured at the index level has been very low. so you haven't had sort of huge swings in the overall markets but you've had an enormous amount of vol underneath the hood so at the single stock level it's been very high and of course when aligned with a higher dispersion generally and lower correlation it all makes for a better stock picking environment and i think the high rates paradigm generally speaking is positive insofar as one you know you get this mechanical advantage of of the pickup on short sale proceeds or on incumbent cash, but also just generally supporting an environment where the differentiation between companies that are growing well, that are delivering returns to investors, that have positive free cash flow, strong growth, and so on and so forth, versus those that are more challenged, I think continues to be the case.

7:00The Long-Short Hosts: And I think the other thing that maybe we didn't talk about so much on the last one of these was what it's done in terms of market participation, which is to say, particularly in the US, you've had the pickup of retail activity and particularly speculative leverage retail activity. And if you look at markets more broadly, generally speaking, markets with high retail participation are good markets for alpha. So I think the rise of retail in the US has also been part of that structural shift towards higher price volatility, which in turn gives more opportunity for skilled hedge fund managers to be able to excel.

7:38Freddie Parker: Absolutely. That sounds like fruitful environment indeed. Let's crack into the details of this report. And I guess the natural first place to start is with the multi-managers, which is always one of the key talking points for the market and market observers. they appear to be uh still doing well uh in the broader scheme of things and and you've written a fair amount about this so so what's sort of the latest in terms of those trends if you are able to sort of generalize slightly i know there's a huge dispersion between them yeah definitely

8:13The Long-Short Hosts: huge dispersion but the thing that continues to be remarkable about this community is every time people call peak platform, they go on and they defy it and scale new heights. And this year has been no exception to that, really. Our latest estimates, and we'll be publishing again on this community at some point in the next month or so, have the AUM base of multi-managers at well north of 500 billion now. It's growth of over 25 % in 12 months alone. We think there's been a record 12 month inflow well north of$50 billion. And at the same time, the performance on aggregate has actually continued to be strong.

8:55The Long-Short Hosts: So if you look at a 12 month look back to the end of June, average multi-manager, obviously noting the dispersion around the mean, was up 12 on a six volt. So it continues to be staggering in terms of the ability of this community to draw in more capital and still deliver those returns on ever increasing AUM denominators. At the same time, I think if you were to raise a couple of notes of caution to sort of balance that very optimistic narrative, the last time we saw flows of this magnitude in 2022, 23, it presaged a period of somewhat more muted returns. And I think at the time we hypothesized that there was a little bit of a digestion process going on whereby multi-managers had to deploy the capital they'd taken in.

9:38The Long-Short Hosts: And it looks, again, as if we're seeing asset growth running ahead of headcount growth. So we think headcount grew maybe by more like 10 to 11 percent. So the likelihood is that with the increase in AUM, you're going to see some deployment pressures in the coming 12 months. That obviously just continues to fuel the ongoing war for talent. It raises the sort of specter of a risk of these managers being somewhat under allocated for some period of time. But against that, I would weigh the fact that we've seen continued deployment on the external side from these managers. So one of the big trends of the last two years has been these managers doing more externally through separately managed accounts.

10:17The Long-Short Hosts: So perhaps the headcount growth isn't telling you the full story in terms of deployment because these managers are going out into the market and deploying capital to existing external managers who don't sit on their balance sheet from a headcount perspective. The other thing I would just say from a performance perspective is we have seen a couple of very challenging months this year for the multi-manager community. So March and July, we have as two of their three worst months on record. So the only worst month is March 2020. So clearly they've faced a few speed bumps in the road along the way.

10:55The Long-Short Hosts: And the other thing that I would note is the correlations they have with equity markets are drifting higher. So it could be coincidental. But if you look historically, the correlations of these managers, on average, tend to be around zero to equities. Over the last year, they've drifted up to about 0.3 on a three-year look back. So maybe coincidental, but I think it's something to watch just as these firms grow bigger. One of the things I think allocators really price from these firms is their ability to deliver uncorrelated returns. So if they're gradually accumulating more beta to equities, whether intentionally or otherwise, I think that's something that would give allocators pause.

11:34Freddie Parker: hmm no absolutely and just before we move on of course that that question around calling the top on platforms from an AUM and just the point where their size really distorts their ability to capture alpha as you say we're in a situation where every time someone calls the top or there seems to be some consensus that we're reaching it they seem to defy that that point from your conversations and sort of your analysis, is it the case that there may well be a top? And we've seen individual funds call the top themselves, historically speaking, at least. Is it a case that the common wisdom seems to be there is a top, but it's far higher than we thought?

12:18Freddie Parker: Or that maybe through these sidestepping, as you say, allocating to other existing niche managers, doing some clever deployment strategies beyond just sort of expanding the strategy allocation size. Where is that conversation today? Because I think a lot of people will be really interested to know sort of whether that fundamental paradigm has shifted.

12:44The Long-Short Hosts: I am still of the view that markets have expanded sufficiently to make room for the growth of the multi-managers, which is to say, if you just think about the total denominator of risk assets, measure it how you want, total market capitalization of equities and bonds, that number has kept going higher. So the tradable universe, if you will, has marched higher alongside their growth. So that's the first point. The second is they've obviously been very skilled at adapting and evolving their businesses and really moving with the times and innovating and finding new pockets and new pools of alpha.

13:28The Long-Short Hosts: you know the externalization trend of the last few years probably just being another one of those but I would say if you do look at historical trends it would tell you that generally speaking whenever there's a pocket of excess return in the market investor capital tends to flow into it until such point as those excess returns go away so it would be hard to argue that that's impossible to happen. But at the same time, whatever that level is, we don't seem to be there yet.

13:59Freddie Parker: Interesting. Well, we'll have to keep an eye out for your next piece of research on that soon to find out how all this is playing out. And I do think you would have to be a brave person to claim to know where the ceiling is for these firms. And it's certainly not been arrived at yet. Let's apply a geographic lens now because we've been covering the various themes playing out across the APAC region this year on the long short. And your report adds some great fresh colour to those stories.

14:27The Long-Short Hosts: So what have you observed? Asia was another sort of major casualty insofar as a lot of the Asia returns year to date had been propelled by names in the AI complex in Asia, thinking particularly places like Korea and Taiwan. So I'm not surprised that we saw the pullback in the way that we did. and it felt probably like a healthy correction of positioning. But I would not say that there has been significant reduction in exposure to that theme since July. So momentum exposure is down. The gross leverage of our book is down. So the overall risk posture, I would say, is called somewhat. But if we were at a 10 out of 10 positioning level at the end of June, And we're probably at a 7 out of 10 now.

15:18The Long-Short Hosts: So it's still definitely there. And it continues to be the dominant market narrative. So I think you would expect hedge fund managers and equity long short managers specifically really to be playing in that narrative and extracting alpha from it. So I think what we saw in July is probably a little bit of a healthy corrective, but it doesn't feel like that trade is in any way over.

15:45Freddie Parker: and just a quick note for listeners uh if your ears pricked up uh the mention of the asian market correction in particular um i encourage you after this episode of course to go and listen to our career episode which uh really detailed uh exactly how uh the cosby index had had grown over how it has over the last few years and um some of the concentration that was going on over there in the AI space, as Freddie says. On the long short point, though, with alpha, your report quite understandably says that the alpha came almost entirely from the long positions. But just taking you into that July correction, did the shorts pick up meaningfully at that point?

16:28Freddie Parker: Did they sort of justify their long short namesake?

16:32The Long-Short Hosts: No, I mean, this has been, I guess, one of the the caveats you have to apply to the strength of long short performance in the last few years is that it has been long side dominated. We saw very strong short alpha in 2022. Since then, there's really been a notable absence of it. And this year has continued to be the case. So if you look at short side alpha, by our estimates, year to date, it's slightly negative. July short alpha was close to zero. So there was not a meaningful pickup. The one thing I will say was obviously that the character of the market movements in July were really rotational in nature.

17:10The Long-Short Hosts: And I think the AI thematic is something that's been expressed both long and short. There's almost been this pair trade of long the winners and short the losers. So I think that played into part of it. But the market was really flat in July. So it wasn't as though we saw a significant broader market correction. We just had this very painful rotation of capital. So I wouldn't necessarily have expected shorts to be a, you know, a meaningful, positive contributor. I think the big unanswered question is what happens when we see a more directional down market again of the sort that we saw in 2022, whether at that point in time, you really start to see the short side of managers books at value in a way that it hasn't on aggregate for the last few years.

17:54Freddie Parker: Because if you were to be a regular listener to a Bloomberg TV or some of the more the finance focused podcasts and TV stations there's no shortage of spokespeople claiming to have an insight to be you know that Nvidia is their top short of the year or something terribly clever where they're they feel that the top is just around the corner and I think some some prominent names have been on record saying that they think it's a short but it's a it's a dangerous game indeed and as you say it'll be more interesting when there's a more widespread and persistent downturn whether that that does come through yes coming back to something you said right at the beginning and again tagging on to to the point I think you made earlier in the year around the higher interest rates creating a better opportunity for hedge funds rising bond yields were a contributing factor to the hurt felt in the AI and the semiconductor stocks specifically.

18:51Freddie Parker: So I was really interested to get your view sitting here today, how that's changed your perception maybe of that point where higher rates become a threat rather than opportunity. Clearly there's sort of a need to that graph as it were.

19:06The Long-Short Hosts: Yeah, I mean, I'd sort of repeat my earlier comment, which is to say I tend to think that higher rates are structurally better for hedge funds regardless. Obviously, it creates challenges for growth focused stocks. And I think if you're running a long short fund that is growth tilted and long bias, then higher rates are a challenge for you. But I think if you think about the industry at large, the reality is that higher rates are probably a better thing on aggregate for more strategies. obviously around an inflection point is quite challenging you know the early innings of the rate hike cycle in 2022 were a good example of that but once you sort of have the trend established towards higher rates I would expect managers to get on the right side of it and then once you're in that era of higher rates I think it's better and I think the other point to make which is maybe a slightly less equity centric observation the one constituency I think that would really benefit from higher rates is credit managers.

20:12The Long-Short Hosts: It's been a pretty quiet period for credit strategies the last few years. It's been a long time since we've seen a true distressed cycle in the classical sense. There have obviously been sort of pockets of dislocation and distress in credit over the last few years. But I think more broadly, if you saw sustained higher rates, you would get a lot more opportunity for that community in particular. So I think if you take the hedge fund industry at

20:38Freddie Parker: large um higher rates are generally a better thing fair enough um discretionary macro was uh a strategy that that i was closely following um for the obvious reasons of having some pretty major events so far this year uh not least in the middle east uh with conflict and and that always bringing a significant uh challenge to the the changing geopolitical and macroeconomic conditions for them and my understanding from your data is that they started strong but actually if you take the first half of the year as a whole they only returned just north of two percent partly due to that middle east conflict i believe so would you mind just talking us through sort of what happened here

21:24The Long-Short Hosts: and and how that situation evolved yes it was really one specific event um one one episode that i think caught managers offside and it happens from time to time in the strategy when you see a meaningful reversal in a consensus trade. So another good example would be, I think it was January 2015, when you had the SNB breaking the peg on Swiss franc. But when you have a consensus trade, and suddenly there's an exogenous event that reverses that, then you can have some pretty meaningful losses. This time around, it was really in the front end of rates in euro and GBP, which had a huge move as a result of the outbreak of the conflict in the Middle East and some of the corresponding expectations around what that might mean for inflation and rates.

22:12The Long-Short Hosts: And obviously, as you had managers coming out of that consensus position, there was a pretty significant fallout. The distinguishing characteristic, I would say, as you look between managers and the dispersion of outcomes, because it's very wide for macro this year, is really did managers close out that position and cut risk or did they stay in the trade and wait for it to come back to them. And those that I think closed out are in a much more challenged position versus those that stayed in the trade, saw a big recovery in April. And actually, some of those have now made it back into double digit territory on the year.

22:52The Long-Short Hosts: But at the same time, I think the hypothesis from allocators continues to be very positive towards the strategy as a whole. it was one of the most sought after strategies as we noted in our media piece the flows continue to be good and as you think about the broader backdrop I think the the thesis is it still is still very fertile right you know you've got all of this this sort of geopolitical noise you've got a new fed chair in the seat you've got plenty of questions around the direction of travel in US and the rates of dollar, stuff going on in Japan, there's plenty for managers to get their teeth stuck into.

23:36The Long-Short Hosts: So the allocator sentiment, I think, continues to be pretty positive, even in spite of what we saw in March. Join us in London on Thursday, the 18th of March, 2027 for AMA's longest running annual conference, the Global Policy and Regulation Reform. As global markets, regulation and the economic landscape continue to shift. This is where the alternative investment industry comes together to make sense of what's next. From private credit at a crossroads, balancing growth, risk and regulation, to a changing world economy and the evolving US rulebook, this form will tackle the forces shaping global finance.

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24:46Freddie Parker: speaking of allocator sentiment actually as you bring it up quant funds uh saw a relatively weak first half um quite understandable given um the sort of the fundamentals of the general conditions that quant strategies do well in um i.e there were there were no trends as you mentioned and things sort of whipsawing around. But as your data suggests, they did attract record inflows, which I guess suggests that allocators broadly see quant as being equally fertile, as you mentioned, sort of just macro being in that sense. Could you just talk around what you're seeing there and how allocator sentiment is maybe lagging performance or pre-empting performance maybe more accurately?

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26:37The Long-Short Hosts: So I think we need to put a little bit of a finer point. The quant catch-all category, I think, encompasses a few different sub-strategies with actually quite different return drivers. Funnily enough, the trend-following community had a relatively better start to the year. And actually, the last 12 months, more generally, have been better for those managers. I'm thinking CTAs and systematic macro funds. So you have broad exposure to trend at a cross asset level where things were a little bit more challenging, I would say would be more in the equity quant space and particularly more startup strategies.

27:15The Long-Short Hosts: So higher frequency trading on technicals, less of the sort of fundamentally factor exposed equity quants who actually had a relatively good first half underpinned by some of the moves in momentum. So the broader allocated sentiment point, though, I would say there are two things that underpin it. One is more broadly, it remains one of the best performing strategies on a longer term look back. So if you do the five year annualized return assessment of where all the various strategies stack up, quant is still close to the top of the list. And that's in spite of the fact that it's generally a market neutral strategy.

27:58The Long-Short Hosts: So it doesn't get the benefit of the tailwind of equity markets in the same way that fundamental long short funds do. And then the second piece is I think there's a few structural tailwinds that are driving this. one is just increasing movement into quant from many strategies from many allocators who've historically shunned it so a good example of that would be u.s endowments and foundations whose portfolios i would say tended to be historically very skewed towards fundamental managers are now starting to do more in in the quant space the other has been private wealth and on the private wealth side of the ledger here in the u.s particularly one of the major drivers has been the proliferation of tax-aware and tax-advantaged strategies from core managers, which has seen a huge increase in demand.

28:47The Long-Short Hosts: And I think that's another one of the major sort of structural tailwinds of growth behind the strategy. So, as you said, relatively softer first half, but nevertheless, the longer term trends, I think, remain intact there.

28:58Freddie Parker: That's really interesting. So actually, there is that structural shift then. And it's not just a case of investors favoring what is perceived to perform well over the next year or two. This is actually a fundamental warming to, as you say, those various quant strategies by those big allocators and not just on the private wealth side. Well, let's turn to that now, as soon as you mentioned it, because, again, you previously identified private banks and wealth platforms as an important source of growth. and that does seem to have borne out. Could you say a little bit more about how that has changed over the past six months?

29:40Freddie Parker: Do we foresee that continuing? And we, in our own research, often talk about investor intentions and speculative figures on allocating to various strategies. But how much of that has actually delivered compared to what you might have predicted?

30:04The Long-Short Hosts: So on the wealth side of things, it's very real. And I would say if anything this year, it's accelerated. So part of that is that tax aware growth that I mentioned. That's a space that conservatively in the last 12 to 18 months has tripled in AUM. So that's a strategy that I think is going to continue to have real tailwinds behind it.

30:28Freddie Parker: Could you just just for those listening, just give sort of the elevator pitch for that, just so people understand?

30:35The Long-Short Hosts: Yeah, absolutely. So this is really a specific US specific phenomenon. In the US, capital gains have different treatments attached to them, depending on whether they're short term or long term. So anything that is a sub 12 month gain is taxed at a higher rate, usually the same rate as your income tax. whereas long-term capital gain gets a more favorable treatment attached to it. What these strategies really aim to do is harvest short-term losses and offset that by accruing long-term gains. So for investors who have short-term capital gains elsewhere in their portfolio or capital gains elsewhere in their portfolio they expect to crystallize, having a loss that you can use to offset that is very helpful.

31:21The Long-Short Hosts: So that's one part which is really actually creating a tax loss that you can use somewhere else in your portfolio. The second is actually it's just a counterweight to the natural tax inefficiency of quant strategies. So because of the fact that quant strategies are relatively high turnover, historically, they've tended to produce almost entirely short term capital gains. So they've been quite tax inefficient for investors historically. So you sort of get these two pieces. One is you offset the natural tax inefficiency of these strategies. And the second is you harvest losses that you can use elsewhere in your portfolio.

31:54The Long-Short Hosts: And really, that's the sort of very basic arithmetic that investors are doing on them. So that's one part of the trend. I would say there's a couple of other mega trends in wealth. One is that alternatives have become an area of focus really across the board. Private credit was probably the thing that was drawing the most inflows from wealth over the last couple of years. And that's been under stress. So in particular, some of the BDC and perpetual evergreen products, which have been marketed heavily to retail, have seen some pressure, particularly around their exposure to software. There's been a desire to try to redeem from these products.

32:36The Long-Short Hosts: Many of them have had to effectively gate those redemptions so that the mood music around private credit and wealth, I think, has some challenges. but nevertheless the alternatives tear wind remains intact. So what else within alternatives have been doing well? Hedge funds. And then the other thing that's been happening is there's been a huge wave of consolidation in wealth. So barely a day goes by where you don't see another M &A transaction announced in the wealth space in the US. A lot of the RAAs, which are one of the mainstays of the wealth channel, these are the investment advisors who manage portfolios for wealthy investors all the way from mass affluent to ultra high net worth, they've been consolidating.

33:17The Long-Short Hosts: As they've consolidated, their sophistication and their ability to evaluate and allocate their clients' capital towards alternatives increases. So I think that's another one of the sort of mega trends behind this. And I think it's very helpful that hedge funds are, from a performance standpoint, one of the standout asset classes of the last three to five years.

33:39Freddie Parker: it might be worth just taking a second before we move on to help those that are unfamiliar with the family office space and this is an area that uh aimer will be looking more into both in terms of our research side and um naturally on the long short as well but freddie if you wouldn't mind just helping listeners understand sort of conceptually the way family offices will will take their portfolio and they will um in very very crude terms have a uh an allocation to alternatives broadly and because it might not be obvious to some people that um stress on private credit or redemptions there would would immediately benefit hedge in the sense that you might be looking that they're so different that you might be looking to other sort of long-term diversifying strategies in more similar to private credit than a shorter term quant strategy as you say but in terms of how family offices think about it and just sort of having that alternatives allocation as opposed to just sort of having one big bucket would you mind sort of fleshing that

34:44The Long-Short Hosts: out a little bit so i might push back a little on the premise of the question here so when i talk about wealth and the growth in wealth, I would say I'm talking much more around what I describe as the wealth intermediary channel. So I'm talking more about private banks, registered investment advisors, broker dealers, right? These are the large, more kind of consortium oriented groups. The RIA space actually includes a lot of much smaller groups as well, but I'm thinking about not the sort of single family office concept of you've set up an entity to manage your wealth because you're an ultra high net worth individual and it's merited.

35:26The Long-Short Hosts: I'm actually thinking about the next layer down in this sort of continuum. And within that, you get some groups that probably sit somewhere on the cusp of being a multifamily office or an RAA. But at the same time, These are groups that are managing money for lots of underlying investors. And the point around alternatives, I think, is sort of twofold. One is, from an investment standpoint, if you're thinking about where does the return come from in your portfolio in the next 10 years, it's probably reasonable to assume that you can't rely on equity market tailwinds in the way that you could in the last 10 years.

36:09The Long-Short Hosts: So if you're going to hit your return targets, you need something else. That something else is alpha. And alternatives managers, whether they're hedge funds or private credit firms or private equity firms, are really all about delivering alpha to their clients. So there's that tailwind. And then the other is somewhat more commercial, which is to say that there's obviously different business models in this space. Some of these wealth managers are just charging a fee on assets. Some of them behave more like distributors and really they get paid when their clients invest in products. And because the fees attached to alternatives are higher, it's a more profitable direction of travel for the wealth channel to distribute versus more traditional investments.

36:49The Long-Short Hosts: So it's those two things that I think that interact as to the sort of broader alternatives tailwind. And I think right now hedge funds are the chief beneficiary of that.

37:00Freddie Parker: Excellent. Well, I'm glad I asked. Thank you for clarifying that. just to sort of knit together two of the themes that we've talked about here your report suggests that more than a quarter of allocators already felt overweight in AI even before the July reversal are they now looking for more AI exposure as you mentioned we've sort of bounced back in many ways or have we revealed what the the real hidden risks are of having that AI exposure and sort of the first and second degree elements when you think about the knock-on effects that we saw in July?

37:40The Long-Short Hosts: I'm not yet seeing anything to suggest that the picture is meaningfully changing, but I think one of the things I would emphasize is the consensus was very low on this point anyway. So we asked allocators, across your whole portfolio on a look-through basis, is how do you feel about your exposure to AI as a theme? Do you think you're overweight, underweight, or more or less in the ballpark of where you want to be? And the proportion of allocators that said they had an overweight was about a quarter. And it was more or less exactly the same as the proportion who had an underweight, right? So there's a clearly polarized point of view there.

38:17The Long-Short Hosts: And then you have about half of allocators who said, broadly, we feel okay about where we are. But when we asked those allocators who are overweight what they're planning to do to address this, you get very little clarity in terms of the proactive steps being taken. The range of responses are pretty wide. The main answer was really around rebalancing managers. So maybe taking some chips off the table, taking some profits, rather than any wholesale changes. I do think, though, it's actually something that allocators should probably be more focused on at a portfolio level. Because the look through exposure, I think at this point in time is very meaningful across all asset classes because you've got it in hedge funds, you've got it in public equities, you've certainly got it in privates, you know, for good and bad, right?

39:05The Long-Short Hosts: If you're allocated to private equity and you've got a bunch of software exposure, you have an AI exposure in there because those companies have been perceived as being the major losers thus far in the sort of, you know, the AI revolution. So I think for allocators to try to sort of measure and manage that exposure is probably something they should be doing a little bit more of. But it's not obvious to me that there's really any wholesale consensus effort around allocators trying to do that.

39:31Freddie Parker: Very good advice. Before we let you go, Freddie, my APAC colleagues will not forgive me if I don't sort of tell the other side or allow you to say the other side of the story on Asia, because we alluded to the challenges earlier in the conversation. But In fact, a more rounded opinion would be to point out that Asia-focused funds did perform exceptionally well, according to your data. Although with the slight nuance that demand for China remains limited and interest in Japan has somewhat called. So would you mind just briefly explaining why allocators tend to prefer that pan-Asian characteristic to the funds as opposed to the individual countries?

40:19The Long-Short Hosts: Yeah, so the overall picture on Asia, as you say, is very positive. Performance this year, notwithstanding July, which was a pretty meaningful pullback, has continued to be strong. You know, through the first six months of the year, our Asia long-short clients were really leading the way. And Asia is back from an allocator perspective. There was a period between 2022 and four where it was really out of favor. There were obviously the concerns around the geopolitical challenges. There was pressure in the US, particularly around exposure to China. And there was also there were questions being asked about the health of the Chinese economy in particular.

40:59The Long-Short Hosts: So it was clearly out of favour. It's definitely back. It's been consistently now for the last 18 months, the region most likely to attract allocator interest. To the question about where within Asia it goes, the thesis on pan-Asia, why allocators tend to do it, is that opportunities have actually been moving pretty rapidly between countries and sectors. and allocators really like the flexibility that that provides. So, you know, the fund managers themselves can really go after the opportunities and prosecute them where they are versus the allocators needing to make big top-down calls about, you know, do I want Japan or China or Korea or Taiwan or whatever it might be?

41:39The Long-Short Hosts: I think the other thing is, as we've had allocators coming back to Asia, if you've not had an exposure for some period of time, then adding a Pan-Asia manager is a really good place to start. And then once you start to go deeper and say, I'd like more exposure, that's when we tend to see allocators adding country specialists. Now, Japan, I would say, in spite of the cooling in our data, anecdotally, we still see a lot of work being done there. But I would say, particularly when it comes to asset owners, it's really been focused on more long-only strategies and those that have an engagement angle to them.

42:16The Long-Short Hosts: There's been this multi-year thesis around improving corporate governance in Japan. And that continues to be something that allocators, I think, are pretty interested in. But it tends to be more of a long only exposure rather than a hedge fund exposure. But at the same time, we're also seeing more in the low net and market neutral space coming to market. So there's definitely stuff going on in Japan. China is definitely more selective. It's actually been the laggard market this year in Asia. where we've seen China managers how interested tends to be either those that have had really strong outperformance or those that have a really institutional setup so it does feel like the the China manager community as a whole has not really been the top of allocated wish list but at the same time there's definitely been managers within that space who've been attracting new capital.

43:09Freddie Parker: That's really interesting and certainly one to watch for the rest of the year. very finally then as we do look towards the final months of the year are there any particular themes that you expect to define at the final few months are there any particular opportunities or risks for hedge funds that you are would like to signpost now it's still hard to look past ai

43:35The Long-Short Hosts: you know just continue to be the dominant theme for markets and it feels like it's going to continue to be the dominant return driver and the dominant risk for some period to come. And I think hedge funds are going to have continued exposure to that. While we've seen a reduction in overall risk in the form of gross leverage and exposure to AI momentum, it's still meaningful, as I said earlier. And I think it's going to be interesting to see how managers move dynamically through this. the analogy that I think is interesting is if you look at the 99 to 2002 period which was arguably one of the periods in which the hedge fund industry really made a name for itself in terms of managers' ability to participate in the upside of the dot-com boom and then pretty adeptly step out of the way and shield investors from the downside it will be interesting to see if we go through a similar cycle in AI the extent to which hedge funds can replicate that success again.

44:34The Long-Short Hosts: The other thing I would highlight is the ongoing improvement in capital markets. So it's an opportunity on a number of different levels. There's hedge funds who have crossover exposure to some of these names. So as you think about the mega IPOs and potential mega IPOs, the SpaceX's, the Anthropics, the OpenAI's and so on, there are hedge funds whose allocators will get, I think, a pretty significant positive return from some of those. And then at the same time, there's been this new evolution of capital market strategies, which are a little bit of a niche, but nevertheless, are gaining more prominence.

45:07The Long-Short Hosts: So these are hedge fund strategies which really attempt to profit from participating in capital markets. And then the second order effect of all of this is, of course, one of the major headwinds to hedge fund asset raising in previous years has been the amount of capital tied up in privates. And so as we see capital markets conditions hopefully continue to improve, that should translate into further distributions from private portfolios, which in turn should create more capital that potentially can be allocated to hedge funds.

45:39Freddie Parker: excellent well Mr Parker you've given us a huge amount to think about I would love to pick your brain for for many more hours but as I said there's already a number of themes here which we will have to digest and come back to in the final months of the year and see how they all play out so thank you so much for coming back on I appreciate you taking the time to break down the data for us and another hugely helpful report listeners if you if you do manage to get yourself a copy, then do take the time. It's certainly one worth your time. But all that is left is to say, Freddie, thank you so much for joining us on The Long Short.

46:16Freddie Parker: Thank you for having me. The Long Short was brought to you by AIMA, the Alternative Investment Management Association, the global representative for the alternative investment industry. As always, you can get the latest episodes by subscribing to The Long Short on Spotify, Apple Podcasts, Google Podcasts and Amazon Music, or by streaming episodes directly from our website, amy.org. Thanks for listening.

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