There’s no doubt about it: In 2022, those involved in hedge funds and family offices witnessed factors and influences few could have predicted.
Supply chain disruptions, the lingering effect of fiscal stimulus, and Russia’s invasion of Ukraine caused inflation to surge to its highest level in 40 years. The Federal Reserve (Fed), like other central banks, tightened aggressively, triggering sharp selloffs in both fixed-income and equity markets. Mid-term elections resulted in a divided government, suggesting little prospect of structural reform to address long-term problems or provide fiscal support should the economy falter. And even as inflation pressures eased at the end of 2022, fears of a recession in 2023 remain high.
While the only thing we can be certain of is uncertainty, 2022 may give us some insight into the challenges and opportunities we’ll face in the coming year.
And that means switching our sights to how to best prepare for that uncertainty as a new year looms.
Focus on These Hedge Funds and Family Office Trends in 2023
So, against this backdrop, what should you and other hedge fund and family office leaders be preparing for in 2023? Here’s what I believe will be eight top trends and some actions you can take to address them:
- Unfavorable economic outlook
- Alternative investment opportunities remain strong
- Hybrid work as the new “normal”
- Outsourcing and co-sourcing
- Growth in ESG and sustainable investing
- Managing technology
- Cybersecurity concerns
- Increased regulatory oversight
1. Unfavorable economic outlook
Inflation, rising interest rates, geopolitical unrest, and China’s slowing economy all point to a difficult economic environment. Investment strategies that seek to mitigate those risks stand the best chance of producing positive returns. Which brings us to our #2 hedge fund and family office trend…
2. Alternative investment opportunities will remain strong
Given an unfavorable economic outlook, investments in non-traditional investment opportunities, including private equity, commodities, and other alternative investment vehicles will be highly sought after in 2023.
3. Hybrid work as the new “normal”
Although the COVID pandemic has slowed and enabled people to resume some sense of normalcy in their lives, different strains of the illness and unknown long-term efficacy of current vaccinations and treatments remain a concern.
Employees continued to head back to the office in 2022, but not in the same way they did pre-pandemic. Offering a flexible work schedule in 2023 is no longer a strategy to differentiate your company from competitors; it’s a requirement to meet the evolving industry standards and employee demands of a new era.
4. Outsourcing and co-sourcing is the way for businesses to survive
In addition to the effect of a global pandemic and evolving work cultures, rising costs and increased specialization have forced many firms to rely on hiring outsourced capital resources to ensure the viability of their businesses. A shift in functions that typically support the infrastructure of a hedge fund or family office, including accounting, compliance, trading, marketing, technology, and human resources to employees and firms that offer outsourced or co-sourced solutions, including fractional or virtual services, will be the only way some hedge funds and family offices can offer the appropriate level of service to meet clients’ demand in 2023.
5. Growth in ESG and sustainable investing
When it comes to addressing environmental challenges, hedge funds and family offices understand that relying solely on government action is insufficient and that their resources can make a difference when they choose to invest responsibly. Those responsible for investment decisions, while wary of investment “greenwashing,” have a role to play when it comes to tackling environmental, social, and governance (ESG) issues, particularly in relation to younger investors and those who feel alienated or disenfranchised.
6. Managing technology
One of the biggest fallouts from the past several years has been the failure of hedge funds and family offices to plan and properly implement viable technology solutions. When lockdowns forced many employees to work from home, firms that could quickly implement secure, cloud-based platforms and video conferencing applications made it possible to work remotely while minimizing negative impacts. In 2023, businesses that become digital industry leaders will enjoy faster revenue growth and higher productivity compared to their less-digitalized competitors.
7. Cybersecurity concerns
A greater emphasis on technology and data in 2022 has brought an increased focus on maintaining the integrity of that data. While cyberattacks are becoming more sophisticated, most breaches can be prevented relatively easily. There are several measures that are fairly simple to implement and that hedge funds and family offices can take to significantly reduce the impact of attacks. There are also broader projects firms can engage in to develop a more tailored approach to addressing cybersecurity threats. Of particular importance is the development of an Incident Response Plan and broader disaster recovery measures.
8. Increased regulatory oversight
While the Securities and Exchange Commission (SEC) has always maintained a tight stronghold over hedge funds, the amount of scrutiny is at an all-time high, given the increased risks and dramatic losses many hedge fund investors have suffered. In addition, there is now an increased call for regulation of family offices, particularly multi-family offices that are responsible for the investment and operational requirements of multiple clients. A carefully managed compliance program ensuring the fair and equitable treatment of all investors is a key component of a prospect’s due diligence in a hedge fund or family office.
The Bottom Line
A new year brings new challenges, but it also brings new opportunities for hedge funds and family office leaders. And while the tumultuous nature of the past few years may have brought a sense of uncertainty, one thing remains abundantly clear: firms need to be prepared to deal with these key trends to improve their chances of success and to reach their peak potential.
If you need support navigating and preparing for the uncertainty of financial markets and the world in general in 2023, see how Arootah Business Consulting can support your firm.
Steven Wilner is Arootah’s chief operating officer, overseeing the company’s daily business operations, leading key initiatives, and implementing company-wide strategies. Steven has more than 34 years of industry experience as a COO, CFO, and CCO in building, growing, and leading successful hedge fund, investment advisory, and asset management firms across a variety of strategies. His hands-on experience with all aspects of the business, financial, and operational needs of hedge funds, family offices, and investment management firms has enabled him to successfully consult and advise several start-ups and established firms on best practices, process improvement, business development, and organizational efficiencies that have resulted in significant and measurable growth and cost-saving measures.