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Renew: framing the current potential opportunity


Part 3 of 3

After a year of political and economic upheaval, the U.S. appears to be entering a period of renewal – renewal in confidence and opportunity. From the energy transition to the digitization of the world around us, this potential renewed economic opportunity is occurring as the greatest transition of wealth gets underway. At the same time, there are signs of the renewed confidence in valuable investment tools, such as actively managed hedge funds, which may help diversify risk and enhance return.

The intergenerational wealth transfer from baby boomers to millennials is projected to reach $68 trillion over the next 30 years[1]. Of this amount, it can be expected that a large portion will find its way into ESG and impact strategies, as well as digital assets given the preferences of millennials highlighted in several recent surveys. Firstly, one survey found that close to 75% of millennials believe that their investments can directly influence climate change, and that they are twice as likely to invest in companies that have a positive impact on the world[2]. Additionally, 67% of millennials said they prefer digital assets, such as Bitcoin, to gold as a safe haven asset[3].  This level of interest is similar to a recent Mastercard report that found 67% are more open to using cryptocurrencies than they were a year ago[4]. As this generation’s investors inherit the wealth of their parents, these preferences are likely to accelerate these broader themes. Given these trends, advisors may not only need access to ESG, impact and digital asset solutions to fulfill this anticipated demand, but they may also need to truly understand these new areas of investment opportunity by delving into education on these new investment opportunities. 

Hedge funds are also experiencing a renewal of investor confidence and interest following their performance during the turmoil of 2020. After trailing the performance of equities for most of the decade long bull run, the volatility experienced last year drove dispersion within risk assets and helped hedge funds deliver their highest absolute return since 2009[5]. The positive performance was broad-based with all hedge fund strategies gaining over the year[6]. On a relative basis, performance was also strong with Equity Hedge strategies outperforming the S&P 500 index over the year. According to J.P. Morgan, hedge funds also exhibited attractive correlation benefits relative to a 60/40 stock/bond portfolio during the pandemic induced sell-off, with the positive correlation between these investments declining at its peak, thereby offering investors protective qualities[7]. This strong and defensive absolute and relative performance has carried over into 2021[8], causing advisors we are hearing from to reassess the potential role that hedge funds may play and tapping these strategies to seek to defend against future uncertainty in the markets.

This period of renewal, the last and final phase in our 3 R’s framework, identifies potential opportunities for advisors and investors by embracing demographic shifts and investor preferences, as well as by revisiting the investment case for the inclusion of hedge funds.