Top hedge fund managers including Maverick Capital's Lee Ainslie and Hayman Capital's Kyle Bass are defending the industry against concerns that passive funds or artificial intelligence could usurp human management.
"The conditions that have perpetuated a multi-year headwind are starting to reverse, with the result being a possible multi-year tailwind for hedge funds," Ainslie said in a wide-ranging paper published Monday.
"Looking forwards, we're entering a period where the possibility for alpha generation should be more rewarding and beta (market) exposure will likely be less rewarding."
The paper, published by the Alternative Investment Management Association and Aberdeen Standard Investments, sought opinions from leading managers on the future of investing.
Hedge funds have fallen out of favor with investors in recent years as basic market-tracking index funds handily outperformed the group during this nine-year bull market. High-profile investors like David Einhorn and Bill Ackman underperformed the market badly in 2017, with net returns of 1.6 percent and negative 4 percent, respectively, versus the historic climb in equities.
Ainslie, who founded Maverick in 1993, now oversees approximately $10 billion in assets under management, according to The Wall Street Journal. A former employee of Julian Robertson's Tiger Management, Ainslie is a value investor known for his stakes in technology.
"History will end up repeating itself and we'll have some geopolitical risk really enter investment portfolios again accompanied by increased volatility," Bass said. "With the introduction of those two ingredients, our business should thrive, because the passive long-only investors will not do well in that environment in my opinion, and hedge funds will do very well in that environment, on a relative basis."
Bass is the founder and managing partner of Hayman Capital Management, where he gained a reputation for betting against subprime mortgages during the financial crisis.
Volatility is sometimes seen as a plus for hedge fund managers, who are able to bet against stocks in treacherous market conditions unlike long-only funds.
Throughout the recent rise in volatility, hedge funds have managed to outperform the market ever so slightly this year, up 0.35 percent as measured by the HFRI Fund Weighted Composite Index. In comparison, the S&P 500 has added 0.27 percent since January. That tiny outperformance is likely not enough to justify their huge fees, however.
"March and the first quarter of 2018 have already defined a significantly divergent financial market and hedge fund performance environment than prior years, with the shift and volatility punctuated by escalation of trade and tariff politics and economics," HFR President Kenneth J. Heinz said in a statement earlier this month.
"As most equity markets declined, hedge funds quickly adapted to low and non-correlated exposures across asset classes, and to capital protection and preservation positions, en route to producing a first-quarter gain," he added. "It is likely that these trends will not only continue, but accelerate into mid-year, driving uncorrelated gains and industry capital growth."
The advent of artificial intelligence and machine learning was another key topic addressed by hedge fund experts in the paper, though many thought it could be a long time until investors fully trust algorithms with their cash.
"It will be tough for technology to truly disrupt investing in the field of financial advice — and to usurp the role of the traditional wealth manager unilaterally," said MIT finance professor Robert Merton.
"The technology industry narrative appears to underestimate the importance and difficulty of acquiring trust. Technology does not create trust on its own," Merton added. "The incorporation of technology by wealth advisors with the trust asset will actually enhance their business, and not destroy it."