Good effort but can do better
In the first half of this year, intense geopolitical wranglings, political manoeuvring and diverging interest rates combined to create a high degree of uncertainty. China's protracted property downturn and weak consumer demand negatively impacted growth. Meanwhile, solid demand and job creation led the Fed to resist lowering rates, unlike the EU and Canada.
While private equity deal-making slowed in the first half,1 overall M&A activity did improve, with the half being the busiest since H1 2022.2 There were 17 deals valued at over $10 billion, totalling $304.6 billion. Yet this figure is far off H1 2019, which saw 22 such deals totalling $708.3 billion.
Assets in hedge funds at the end of the half hit an all-time high of $4.3 trillion,3 an increase of $11 billion in Q2. Within this world, equity funds performed best among the mainstream strategies, closely followed by global macro.
The HFRI Equity Hedge index closed the half +6.2%, topped by Quantitative Directional +11.5%, primarily driven by technology and communication stocks. While a few equity managers did shoot the lights out – notably Light Street and Whale Rock – many still lagged the equity indices, with the Nasdaq 100 +17.5% and S&P 500 +15.3%.
Event-driven was a tougher nut to crack, with the HFRI index +2.8%. Record global activity from the Activist managers - Lazard's reported 147 campaigns - did not materialise into big returns, with the index up only +0.8%.
Such an environment was better suited to the global macro managers, with the HFRI Macro index +5.4% as various themes played out, across rates, equities, inflation, currencies, monetary policies and geopolitics. Systematic managers, in particular, outperformed with the HFRI Systematic Directional Index +7.9%
There were plenty of successful fundraises in private equity. These successes, however, masked the growing bifurcation between the large, big brands, who continue to see the inflows, and the smaller, lesser-known managers who struggled to gain any real traction. Hellman & Friedman, EQT, Silver Lake, KKR, Cinven, and Brookfield were among the big brands to raise sizeable funds. But the one shared problem that all private equity houses face are unattractive entry and exit points, and the $2.6 trillion of uncommitted capital sitting on the sidelines.4
Hedge fund fundraising was not much easier, with a few 'big brands' having to lower expectations on launch. The most notable was Jain Global, which launched with $5.3 billion, having talked up a target AUM closer to $10 billion. What was very apparent was the large number of hedge and private equity funds opening offices and launching funds in Dubai and Abu Dhabi.
Another trend was the continued growth of private credit, with some of the more prominent alternative funds building out or launching their credit arms from scratch. Goldman Sachs Asset Management raised $20 billion for senior direct lending, while the more traditional credit house, HPS, raised $21.1 billion for its latest flagship fund.
There were further moves by alternative businesses to grow their private wealth channels and diversify their investor bases. Particularly active in this space were BlackRock, Carlyle, Blackstone and KKR, with the latter linking up with Capital Group to offer private investors broader access to alternative-type investments.
Turning to the second half of this year and this environment should be well suited to tactical hedge fund strategies, particularly macro hedge funds, less so equities, as rates come down and geopolitics ramps up. We also think it is a better environment for M&A as corporations look to fast-track growth in this slow growth environment, alongside the number of active sellers and that mountain of 'dry powder'. Unless you are a big player, the fundraising environment is still likely to be sticky, although there will always be interest in experienced teams and good stories, strengthening the case for building solid and identifiable brands to stand out in this busy crowd.