Banking’s 2021 Outlook: Transformation and Resilience

“Hedge funds performed well in 2020,” says the alternative assets intelligence firm Preqin.

With returns of 16.63% across all asset classes, hedge fund returns were ahead of the S&P 500 PR Index, which closed the year at 16.26%, according to the 2021 Preqin Global Hedge Fund Report. It was the asset class’ highest annual return since 2009.

Preqin said the best performing strategy was equities, with a 19.64% return. Credit strategies provided the lowest returns at 5.24%.

In addition to a strong upside, Preqin said, “Hedge funds also offered downside protection through lower levels of volatility over 2020 compared with the public markets.”

Accounts under management grew by 6% over 2019 to $3.87 trillion as of the end of November. Though modest, it was a significant turnaround from the first two quarters of the year when investors fled the sector for the lower cost and more passive UCITS (Undertakings Collective Investment in Transferable Securities) and ETFs (exchange traded funds).

“The direction of flow reversed in the third quarter,” Preqin says, “Suggesting an increasing investor preference for active management over tracking.”

As cautious as investors themselves, hedge fund professionals launched significantly fewer new funds. Liquidations exceeded new funds by 758 to 740 for “only the second year on record,” said Preqin. The previous time that happened was in 2019.

Still, Preqin listed 18,303 funds at the close of 2020, just behind the record of 18,391 recorded in 2018.

The report identifies what it describes as five “megatrends,” themes that will continue to shape the hedge fund industry:

1. ESG – Typically described as social investing, ESG considers environmental, social, and governance issues in deciding on investment. Preqin says ESG “has moved into the mainstream and is a key consideration” for investors and fund managers.
2. Capital consolidation – “Established managers are taking a growing share of capital raised across all alternative asset classes.”
3. Diversification — Since 2016, investors’ primary reason for allocating to hedge funds has been diversification, says Preqin. That will continue, predicts the report, as “investors are more focused on low correlation than returns.”
4. Customized solutions – The shift away from fund products can offer lower fees and allow investors and managers to take part in opportunities more equally.
5. Rising allocation to alternatives – “Investors are increasing their alternatives allocations to produce better risk-adjusted returns and protect the downside.”

Preqin’s head of research insights David Lowery says, “After nine consecutive quarters of outflows, Q3 2020 marked the first quarter of net inflows, bringing much-needed optimism to the hedge fund industry. Established managers are taking a growing share of capital raised across all alternative asset classes, but investors are seemingly aware of the benefits of investing in first-time funds and are taking advantage of the large supply.”

Photo by Chris Liverani on Unsplash

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With Gen Z — that generation born after the mid-1990s — beginning to earn their first paychecks, the establishment banking industry is rushing to sign them up and capture their loyalty before they decide to go with a fintech startup.

“Financial marketers must reach out to this generation right now or their window of opportunity may slam shut forever,” cautions The Financial Brand’s Executive Editor Steve Cocheo.

The dire warning is based on a report from Raddon Research which says 8-in-10 Gen Zers are “open to and excited by nontraditional financial services” or “love digital banking channels” and prefer avoiding in-person banking, even if they consider traditional banks necessary.

It’s especially urgent for credit unions and community banks to move quickly and decisively, because they’re still playing catch-up for the business of millennials who gravitated to the nation’s biggest banks. Credit unions are doing better, but community banks, according to research cited by The Financial Brand, are struggling to capture younger banking customers.

Geography, which used to be the primary influencer on where a customer chose to bank, has a far less important role since the advent of digital banking. When you need cash, ATMs are ubiquitous.

It seems a reasonable case to make that the banking industry as a whole, and smaller banks in particular, needs to develop products and offerings geared to the Gen Z market.

But a Forbes article says, “Don’t believe it.”

“Warnings like this are reminiscent of those from 10 to 15 years ago regarding millennials. Roll the clock forward to today, and three megabanks — Bank of America, Chase, and Wells Fargo — have 44% market share of millennials. And they were hardly the ones ‘decoding’ millennials before it was “too late.”

So who should banks be pursuing with vigor? Baby boomers, writes Ron Shevlin, managing director of fintech research at Cornerstone Advisors.

He doesn’t suggest ignoring Gen Z, just that banks gave at least equal time to older customers. Three trends make boomers different from the generations that preceded them:

1. They are working longer and many are taking part-time jobs in retirement to keep busy and supplement their income.
2. Family dynamics are changing how money is handled and debt is incurred. Many boomers have taken over the financial affairs of their aging parents.
3. Healthcare is becoming a greater concern due to rising costs and worries about incapacitating illnesses and the need for long-term care.

Concludes Shevlin: “The oldest boomers are just in their mid-70s. The challenges listed here are more prevalent among consumers in the late 70s and early 80s, however. This means there is a window for new product and service development. With the youngest boomers in their late-50s, it also means that the life cycle for these new products and services could run for the next 30 years.”

Photo by Eduardo Soares on Unsplash

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