Amid volatility that wreaked havoc on the market last year, hedge funds lost almost $125 billion worth of assets from performance losses, according to Hedge Fund Research (HFR) data. Investors also pulled their money from hedge funds last year, leading to a net outflow of $55 billion, the largest capital flight from hedge funds since 2016. This is a sharp reversal from 2021 when hedge funds saw $15 billion in net inflows. Volatility in the markets was triggered by high inflation, interest rate hikes, and Russia's invasion of Ukraine. Investors pulled $40.4 billion out of hedge funds that buy and sell stocks, a strategy that posted the worst performance for the year, losing $112.5 billion. Even macro funds that saw strong performance last year dealt with outflows. Institutional investors pulled $15 billion from these funds, according to HFR. In fact, the only hedge fund strategy that did see an increase in money was event-driven mergers and acquisition and credit funds that saw $4.3 billion in inflows. It was a tough year for performance overall for the hedge fund industry, as the HFRI 500 Fund Weighted Composite Index fell 4.2%. The index tracks many of the largest global hedge funds, marking the worst performance since 2018.

Finsum:The hedge fund industry lost $125 billion last year amid market volatility triggered by high inflation, interest rate hikes, and Russia's invasion of Ukraine.

According to Vanguard, investors that allocated part of their portfolios to low-yielding municipal bonds at the beginning of last year should now be looking forward to the prospect of higher income, thanks to a rapid rise in rates. In a fixed-income report for the first quarter, the fund firm wrote, “Following a year with $119 billion of outflows from municipal funds and ETFs, we expect the tide to turn. For high-income taxable investors, we are expecting a municipal bond renaissance.” According to the report, muni bonds only offered yields of around 1% at the start of 2022, compared to yields that now exceed 3% before adjusting for tax benefits. Tax-equivalent yields are at 6% or even “meaningfully higher for residents in high-tax states who invest in corresponding state funds.” Vanguard said that this makes munis a “great value compared with other fixed income sectors and potentially even equities—especially with the odds of a recession increasing.” According to the Vanguard report, muni bonds also remain strong from a credit perspective, with attractive spreads over comparable U.S. Treasurys and corporate debt. In fact, municipal balance sheets are stronger now than they’ve been in two decades, leaving states well-prepared to navigate an economic slowdown.

Finsum:According to Vanguard, higher yields and solid balance sheets make muni bonds a highly attractive option for investors this year.

Last year was a notable year for ESG investing. While ESG funds dealt with underperformance, anti-ESG initiatives, and regulation, demand continued to be strong for these funds. This year could be just as eventful for the strategy. First, there were record numbers of shareholder resolutions filed at public companies last year due to the SEC’s friendlier stance on them. That is expected to continue as companies set climate-related targets and shareholders press them on ESG matters. Second, while 57% of institutions expect the energy sector to outperform the market again this year, according to Natixis’ Global Survey of Institutional Investors, 46% said that they are increasing investments in renewables, twice the rate of those increasing investments in fossil fuels. Third, while the SEC has proposed a set of rules designed to help curb greenwashing, firms have a bigger motivator to stop, sweep examinations. According to Michael McGrath, a partner at K&L Gates, “That has had a greater impact on the approaches of firms to their ESG marketing actions thus far than have the new rules. That’s really because firms have an immediate concern that needs to be addressed.” The last theme to watch is anti-ESG initiatives. Asset managers that are focused on sustainable investing will have to accept the fact that they may not be competitive in some markets.

Finsum:2022 was a highly eventful year for ESG investing and this year will be no different due to themes such as shareholder resolutions, increased investments in renewables, SEC sweep examinations, and continued anti-ESG initiatives. 

Last year, portfolios that were allocated to 60% stocks and 40% bonds were hammered, as both the stock and bond markets sustained heavy losses. The portfolio has generally yielded steady gains with lower volatility since the two asset classes typically move in opposite directions. However, the strategy backfired last year after the Fed’s tightening policy sent stocks tumbling from record highs and drove Treasuries to the worst losses since the early ‘70s. This made advisors and investors question the viability of the 60/40 model. But the bond market’s selloff last year pushed yields so high that analysts at BlackRock, AQR Capital Management, and DoubleLine expect fixed-income securities to breathe new life into 60/40 portfolios. This year, both stocks and bonds have gained, propelling the 60/40 portfolio to the best start to a year since 1987. Their view is supported by the expectations that the Fed is nearing the end of its tightening policy as inflation comes down. If this view turns out to be correct, it reduces the risk of bond prices falling again and allows them to once again serve as a hedge against a potential drop in equities stemming from a recession. In a note to clients, Doug Longo, head of fixed-income strategists at Dimensional Fund Advisors, wrote “Expected returns in fixed income are the highest we’ve seen in years.”

Finsum:Based on the view that the Fed is nearing the end of its tightening cycle, analysts expect fixed-income securities to once again serve as a hedge against stocks in the 60/40 portfolio.

While some alternative managers have been benefiting from the market volatility, it’s been a challenging environment for fundraising. In fact, some of the top brand-name firms are having trouble hitting their targets, let alone their hard caps, according to industry insiders. While there are several reasons for this, liquidity issues among limited partners from the "denominator effect" is high on the list. The denominator effect is when volatility in the public markets impacts fundraising in the private markets. It occurs when the value of one portion of a portfolio decreases drastically and pulls down the overall value of the portfolio. Last year, capital commitments were down 1.4% to $497.3 billion as of Dec. 22 compared to $504.3 billion in all of 2021, according to Pensions & Investments data. Private equity was the only alternative category in which both the number of funds and the amount of capital committed increased in 2022. However, fundraising by private equity funds worldwide was down 41.8% year over year in the third quarter of last year based on data from Preqin. According to Adam Bragar, New York-based head of the U.S. private equity practice of Willis Towers Watson PLC, “Whether the slowdown in commitments will continue into 2023 depends on investors' current and projected liquidity.”

Finsum: It’s been a challenging fundraising environment for alternative managers stemming from liquidity issues among limited partners due to the denominator effect.

Rockefeller Capital Management recently announced that it has nabbed a team of advisors from UBS. Ladage, Smith, Garcia Wealth Partners joined Rockefeller Global Family Office in Austin, Texas. According to the company, this marks Rockefeller’s first private advisor team to be headquartered in the city. The team is led by managing directors and private advisors Alex Ladage and Landon Smith, and also includes senior vice president and private advisor Jorge Garcia, as well as senior client associates Monica Vallejo and Carl Pavlich. Ladage started his career in 2001 at Merrill Lynch and joined UBS in 2009. Smith began his career in 2003 at Edward Jones. He moved to Merrill in 2005 and joined UBS in 2009. According to Forbes, Ladage’s team managed $1.4 billion as of April 2022. Christopher Dupuy, co-president of Rockefeller Global Family Office, said the following in a press release announcing the move, “As we’ve expanded the reach of Rockefeller across the United States, we see significant opportunity to deliver premium and differentiated wealth management services to clients and prospects in Greater Austin and beyond.” In September, Rockefeller CEO Greg Fleming told Reuters that the company aims to more than double its assets under management over the next three to five years.

Finsum:With Rockefeller Capital Management looking to increase its assets under management by more than double over the next few years, the firm lured a $1.4 billion advisor team away from UBS.

Frontier Asset Management and 55ip are combining their areas of expertise to offer financial advisors a unique set of model portfolios that will minimize risk and seek ideal tax management solutions. The two firms inked a deal this month that will apply 55ip’s tax management solutions to Frontier’s risk-averse ETF strategies so advisors can utilize both techniques within model portfolios. While Frontier does not have any proprietary ETFs, it publishes investment strategies that are used by advisors. The firm establishes a downside risk target for each strategy representing the expected one-year loss potential over 12 months. Their strategies are built around the idea of not losing more than the downside risk target 95% of the time. 55ip, on the other hand, offers tax management for an array of products such as model portfolios, ETFs, direct indexing, and active SMAs. It achieves this through proprietary algorithms, which keep track of the different portfolios the firm oversees along with every tax position and tax law related to those portfolios. Rob Miller, CEO of Frontier had this to say about the deal, “Being able to utilize 55ip’s tax overlay service within our risk-managed services gives a really unique product in the investment advisor space. We’re hoping that investment advisors will get the best of both worlds with tax and risk management for their clients.”

Finsum:Frontier Asset Management, which provides risk-management strategies, and 55ip, which offers tax management solutions are combining their expertise to provide advisors with a unique set of model portfolios.

According to new survey data from SoFi, more than a third (37%) of investors said they made impulsive investment decisions due to heightened volatility in the market last year, with younger investors significantly more likely to do so. Out of the 1,000 investors surveyed by SoFi, 29% said they bought a lot of investments, 17% said they sold a lot of investments, and 55% did not buy or sell. While impulsive trading during heightened market volatility is normal, it’s exactly what financial experts say not to do as it can hurt your portfolio over the long run. Instead, investors should stick to their investment plan and stay the course. Joel Mittelman, president of Mittelman Wealth Management, previously told Money.com that “Ironically, during a period of extreme volatility is exactly when you need the discipline and structure of some investment plan. Unfortunately, that's often when people throw the plan in the garbage." Investors are often unsuccessful at predicting the market, so staying invested is typically the best way to optimize returns over the long term. Plus, when you stick to your plan, you won’t miss out on the eventual recovery.

Finsum: A recent survey by SoFi found that 37% of investors made impulsive decisions due to the heightened market volatility last year, the exact opposite experts recommend.

While ESG continues to face backlash on the political front, this is still a strong demand for sustainability from investors. For example, recent research from Ernst and Young (EY) found that sustainability experience at the board level in Europe has increased over the last six months as companies respond to investor demand. The latest EY Boardroom Monitor found that 32% of companies currently have board directors with professional experience or expertise in sustainability. While that figure may seem low, it’s a big jump from EY’s Boardroom Monitor in June, when only 19% of boards monitored listed sustainability expertise. The jump in experience corresponds with EY’s research that showed sustainability was a dealbreaker for investing for a majority of investors. Over fifty percent (51%) of investors said boardroom experience in sustainability has a ‘significant’ impact in terms of making a company an attractive investment. Twenty-two percent went further, saying it has a “highly significant” impact on a company’s investment case. Other findings from EY’s research revealed that sustainability experience is much more prevalent among female board members. While the current gender split in financial services boardrooms is 58% male and 42% female, 72% of board directors with experience in sustainability are female.

Finsum:According to research from Ernst and Young, sustainability experience in the board room jumped from 19% in June to 32% as companies respond to investor demand.

LPL recently announced that it nabbed two advisors from Securities America. Eric Fenton and Rodney Wangler, who operate as Fenton Wangler Financial, and are based in Vancouver, Washington, will link up with the JFC Advisor Network, which conducts brokerage and advisory business through LPL Financial. The duo managed a combined $300 million in advisory, brokerage, and retirement plan assets at Securities America. Fenton has been in the industry since 1989. He started with Mutual Service Corporation but has also been affiliated with The Prudential Insurance Company of America, Pruco Securities Corporation, Mony Securities Corporation, Carillon Investments, Sunset Financial Services, SII Investments, and Securities America. Wangler started his career in 1996 with Pruco Securities Corporation. He has also been registered with Mony Securities Corporation, Carillon Investments, Sunset Financial Services, SII Investments, and Securities America. In a statement, Fenton had this to say about the move, “LPL invests heavily in its innovative technology, which is critical to keep pace in this ever-changing environment. We recognized that we needed a platform such as LPL’s ClientWorks where everything is connected, making it easier to do business. Our clients will also appreciate Account View, where they can easily view reports and account information in one place.”

Finsum:A duo from Securities America made the move to LPL due to the firm’s investments in innovative technology, which make it easier to do business.