Though hedge funds have suffered severe losses due to the coronavirus-related recession, the White House is not going to bail them out. US hedge fund managers have explained how their businesses are weathering the perfect storm and what unique opportunities COVID-19 has offered.
On 24 April, the US Small Business Administration announced that that hedge funds and private equity firms aren’t eligible for the small business relief programme as President Donald Trump inked into law a $484 billion aid package, part of the White House’s $2 trillion-plus response to the COVID-19 pandemic.
“Hedge funds and private equity firms are primarily engaged in investment or speculation, and such businesses are therefore ineligible to receive a PPP loan,” the SBA said in an official statement.
Like any other sector of economy, hedge funds are struggling to persuade clients to increase investments amid the market meltdown. They were projected to lose up to $20 billion this year with endowments, foundations, pensions and sovereign wealth funds expected to make the most withdrawals amid the coronavirus pandemic, as Bloomberg outlined late February citing a Goldman Sachs Group’s study.
Small-Sized Hedge Fund is Akin to Small Business
D’Souza notes that now many funds have to answer to their investors amid the present draw-downs: “The timing is horrible as many Baby Boomers are entering retirement,” he says. “The last thing you want is taking a 20% haircut to your net worth right at retirement.” According to him, this will continue to squeeze fees on fund managers and question their ability to add value.
It’s unfair to exclude hedge funds from the small business relief package, he believes, as they are providing numerous jobs just like those eligible for the aid.
The attitude demonstrated by the SBA apparently stems from a common perception of hedge funds as “wildly profitable enterprises supported by hundreds of millions of dollars in annual management fees”, suggests Julian Klymochko, CEO of Accelerate Financial Technologies.
“Clearly they don’t have any sort of bailout”, he notes, adding that like with any business, there are also startups and smaller players which are not so well-established, and not well-capitalised.
“This pandemic has been pretty devastating for us”, he says. “So it’s not really fair to make a blanket statement on any type of business.”
Nevertheless, there is still a silver lining to the pandemic, hedge fund top managers say.
One of these tremendous opportunities is in arbitrage, according to the Accelerate Financial Technologies executive.
“What we did to capitalise on the crisis, we launched the Arbitrage fund, so that launched on 7 April,” he notes. “We’re pretty excited about that. We created a new fund such that we can give access to investors for that asset class and the opportunities that come with it.”
The major objective of the newly established Accelerate Arbitrage Fund (ARB) is to generate returns by investing in “listed equity, debt or derivative securities of target companies involved in mergers or corporate actions”, while “selling short certain listed equity, debt or derivative securities of acquirer companies involved in mergers or corporate actions, where applicable”, according to Markets Insider.
According to him, “deeply understanding the new opportunities and innovations that will rise from the COVID disruption is where managers can deliver alpha”.
D’Souza, who also runs Blockchain Opportunity Fund, a digital currency hedge fund, points out that though Bitcoin remains “a risk on asset as it is a commodity in its infancy” it “has been on an upward trajectory since it was created after the 2008 Crisis”.
“I believe the future of cryptocurrency is bright,” the hedge fund manager opines. “The world is quickly shifting towards a ‘digital world’. Millennials are now the largest generation in the world. Them and the generation under live in a digital world – mobile payments (82% of payments in China are mobile), smart phone usage, and now working from home etc. There will be digital payments and Bitcoin will be a digital gold”.
Meanwhile, one should keep an eye on the changes and be prepared with cash to capture the next opportunity as every day in a Bear Market is a day closer to the Bull Market, D’Souza says.
The views and opinions expressed in the article do not necessarily reflect those of Sputnik.