Investing in private partnership structures such as hedge funds, private equity and private real estate can be a fruitful and exciting endeavor, especially when venturing into asset classes that lack competition and efficiency. An important qualification to remember when beginning due diligence on a partnership is that no investment is perfect. Each one has its own risks, however esoteric or idiosyncratic, and risks change over time, as do the operations and other intricacies of investment management.
The past year could be characterized as a year in which the unexpected happened, with perhaps the Brexit result and Donald Trump’s triumph in the U.S. presidential election the pinnacle of a series of unpredicted events. As markets struggled to respond to these surprising outcomes, volatility increased and hedge funds, following two years of returns below 5%, were able to capture some upside, adding 7.4% during the course of 2016.
Crude oil prices are gaining ground after hedge funds capitulated and Russia says they favor extending production cuts. Hedge funds cut their net-long position by 7%, while shorts jumped by 37 percent. The funds that were long and survived the market collapse are now chasing the market lower. That might not be the best plan as oil inventories in the US are set to fall again.
Bank stocks are back in vogue for hedge funds, which have shunned the industry over the past seven years due to a squeeze on banks' profitability from low interest rates and because of their opaque balance sheets. The election of U.S. President Donald Trump has already tempted some hedge funds back into bank stocks to raise their bets on deregulation and interest rate rises in the United States, which could help banks to earn higher returns on deposits.
The top U.S. securities regulator on Wednesday charged billionaire investor Leon Cooperman with insider trading, making him the highest-profile target in years in Washington's ongoing crackdown on illegal trading at hedge funds.