In May, participants of EADA’s International Master in Finance attended the course Hedge Funds Demystified: in search of Alpha taught by Professor Alejandro Alcaraz. The course was one of 15 electives in three areas (corporate finance, investment banking and FinTech) offered during the strategic specialisations in the third trimester of the programme.
Professor Alcaraz holds an MSc in Business from the Management School of Barcelona and graduated from the Financial Management programme at EADA. He has gained extensive experience through positions held such as Financial Manager, Fund Manager and Financial Analyst for prestigious companies including CaixaBank Asset Management, Finance and Investment Bank (FIBANC) and Shandwick UK Group.
Professor Alcaraz is currently Managing Partner of Spinnaker Consulting. In this interview, Professor Alcaraz shares his views on the future of hedge funds and where we go from here.
Tell us a bit about your class Hedge Funds Demystified: in search of Alpha. What is the key takeaway for students?
Diversification is a technique that reduces risk by allocating investments across various financial instruments. It aims to maximise returns by investing in different areas that would each react differently to the same event. Because the effect of globalisation, this has been even more difficult during the last decades. So, an alternative investment showing a low correlation in a high correlated world opens a lot of opportunities. That’s the main point when looking at the hedge funds world.
In this course, the students went over the different strategies a hedge fund implements in order to deliver returns more than the traditional assets. I would say, to discover “the sorcerer’s stone” in order to generate extra value, also known as “alpha”.
How do you think that hedge funds will evolve over the next few years?
Hedge fund assets are expected to balloon in 2021, fuelled by the most significant growth in the past ten years. The last decade was marked by performance growth, while this year is expected to record an all-time peak due to net inflows. The market volatility of 2020 stress-tested the hedge fund industry and, for the most part, fund performance met investor expectations. Modest losses in Q1 followed by a recovery and continued positive performance led to growing investor confidence.
The growth in the hedge fund industry will largely come from institutional investors allocating away from low yielding fixed income investments to hedge fund strategies with higher expected returns, as well as strategies that are uncorrelated to the performance of the capital markets.
How can the market maintain ethical standards in hedge funds with limited regulation?
Investing with an eye toward Environmental, Social and Governance (ESG) considerations has been gaining traction across a broad spectrum of investors. It should come as no surprise then, that more investors are placing a greater emphasis on ESG in their hedge fund allocations.
The heterogeneous nature of hedge funds as an asset class means there are important differences from long-only funds in terms of how they might incorporate, develop and implement a responsible investment (RI) policy. Due to the sheer breadth and range of trading instruments and market strategies spanning equities, fixed income, commodities and FX, some hedge funds are likely to be better placed to integrate an RI policy than others.
How has your extensive experience informed what you teach at EADA?
I have a 30 years’ experience in hedge funds, which is very valuable. In all of my lectures, I try to explain what I did and how it was done when I was playing the financial markets in front of screens all the day long. Undoubtedly, the students appreciate the difference between this way of teaching and that of a traditional masterclass.
What would you say about the expectations of students who want to get into hedge fund management?
The opaque nature of most hedge funds has created a lot of misinformation about the industry. People tend to underestimate how long and hard you’ll have to work to be successful, and the eye-popping salaries and bonuses that make headlines are more of a rarity than the norm.
It’s obvious that landing a hedge fund job can be lucrative, but it’s also highly competitive. Building a hedge fund career takes determination, networking stamina, and a fierce competitive streak.
How can students know if hedge funds are right for them?
Working in asset management is highly competitive, so you need to have a clear idea of what you want and what you can offer. A classic technique for determining your professional goals begins with 3 circles:
- Draw three circles.
- In one, write things that you are passionate about.
- In another, write jobs that take advantage of your experience or that you could be “the best in the world at”.
- In the last one, include ideas that drive your own financial engine.
- Identify which ideas overlap in all 3 circles. Is asset management there?
If it is, the next step is to develop your unique value proposition, which means defining a niche and honing in on that area. For example, if you want to be a cryptocurrency trader, write a few white papers on that and focus your job search on companies that specialise in related funds.