Interests in Alternative Investments Rising

The demand for alternative investments is currently strong, and only expected to get stronger. At it’s pre-financial crisis peak, the alternative industry managed $2.2 trillion in AUM. At the end of 2020, alternative firms globally held $10.8 trillion in assets. Alternative assets AUM is expected to rise to $17.2 trillion by 2025.

Retail investor interests in alternative investments is starting to grow quickly with increased accessibility and lower fees. As an advisor, this provides you with an opportunity to engage in a fast-growing industry. Alternative investments provide a source of returns that can be independent of the stock market, increasing overall portfolio diversification, which can improve the sustainability of wealth generation.

Volatility as a tailwind

Prior to 2022, the ultra-low interest rates and quantitative easing by the U.S. Federal Reserve and other central banks helped drive investors into risky assets, which was a tailwind for all stocks. That helped reduce dispersion among individual equities, tightening the range between best- and worst-performing issues, and depriving fund managers of alpha opportunities.

Now, however, with price moves that are more frequent and extended, a much broader range of opportunities opens for a variety of hedge fund sectors. For example, in Equity Market Neutral, sharper price movements can push long and short positions farther in their trading ranges, potentially boosting profits.

Short rebate inflates

Rising interest rates provide yet another direct benefit to highly hedged strategies. To see how, consider a short-selling transaction by a typical long/short equity fund. When the fund sells borrowed shares, the cash proceeds from the sale generate interest, which belongs to the lender of the stock. However, the fund is typically entitled to a portion of that interest, known as the short rebate.

With the effective federal funds rate at 0% in nine of the last 13 years, the short rebate had zero benefit for equity long/ short funds. But with federal funds exceeding 4% at the start of 2023, the short rebate is expected to be significantly additive to long/short equity returns.

To learn more about Warhawk One, we invite you to contact the Warhawk One team directly at (847) 957-2015 and ir@warhawkone.com

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