While the start of 2020 has been a challenging period for just about every asset class, our hedge fund offerings—the SEI Opportunity Fund and the SEI Special Situations Fund—suffered only a fraction of the equity market’s downside.

Both Funds were also well ahead of the HFRI Composite Fund of Hedge Funds Index over one, three and five years; over the last three years, the risk-adjusted return (or Sharpe ratio) of each Fund also exceeds that of the HFRI Composite Fund of Hedge Funds Index.

Annualised Performance as at 31 March 2020

While we took our lumps during the first quarter, our losses were generally in line with expectations. Many higher-profile hedge fund managers stumbled during this time. These managers typically had a few things in common—exposures that we try to avoid in our own investment process:

• Excessive leverage: Leverage can be good on the way up, because it magnifies returns. But it also magnifies losses on the way down; counterparties can force holders to liquidate at inopportune times. This is why we tend to avoid highly-levered strategies.
   
• Liquidity mismatches: Anything our managers own must be liquid over a period of a few months. Many strategies, such as private equity and parts of the asset-backed markets, have found their ways into hedge fund portfolios and created liquidity mismatches, which hurt investors in the first quarter.
   
• "Bubbly” markets: Parts of the market that have become popular in recent periods can grow riskier at inflated prices as investors pile on capital. Examples of this include direct lending (over the last few years) and various strategies looking to sell volatility.
   
• Excessive complexity: If we can’t explain it to our clients, we don’t invest in it. In times of stress, excessive complexity tends to hurt.

Looking Ahead

We believe the current crisis has increased the attractiveness of valuations in several areas:

• Mergers & acquisitions: In mid-March 2020, merger spreads exceeded the levels they reached in 20085. Most of these strategic deals are likely to be consummated before the end of the year, so they do not require an investor to take a long-term view.
   
• Relative value: Market volatility has created distortions within the capital structure of companies, such as between common equity and debt, or between share classes of the same company. These types of anomalies don’t really exist in “normal” times, but are plentiful in the current environment, creating opportunities in the short term.
   
• Corporate credit: The coming default and restructuring cycle is likely to exceed anything in past crises. The enormous amount of low-quality, investment-grade (BBB) issuance that we believe could be downgraded will put pressure on the high-yield universe. The severity and pervasiveness of the downturn will likely force many issuers into restructuring, which could create attractive opportunities for investors.

SEI’s View

At its core, the current crisis is a tragic event. But from an investment perspective, we believe it will generate opportunities for hedge fund managers to put capital to work.

Broadly speaking, our strategies have done their job over this time. They have limited losses in a difficult market. As a result, we believe our underlying managers are in a good position to take advantage of some of these opportunities and generate returns.

We recognize that the hedge fund industry has become more crowded and competitive in recent years, and it has become more difficult to remain differentiated and generate alpha. SEI’s approach has adapted and evolved in an effort to continue finding managers and strategies that can deliver attractive returns for our clients. 




























Important Information

The opinions and views in this commentary are of SEI only and are subject to change. They should not be construed as investment advice.

Investments in SEI Funds are generally medium- to long-term investments. The value of an investment and any income from it can go down as well as up. Investors may get back less than the original amount invested. Returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Additionally, this investment may not be suitable for everyone. If you should have any doubt whether it is suitable for you, you should obtain expert advice.

These funds are non-EEA Alternative Investment Fund managed by SEI Investments Management Corporation (SIMC). These funds are registered for private placement in the United Kingdom and the Netherlands. These funds are only available to persons who are “professional investors” for the purposes of the Alternative Investment Fund Managers Regulations 2013 of the United Kingdom. For investors in the Netherlands, shares in the non-EEA Alternative Investment Funds may only be offered, sold, transferred or assigned, as part of their initial distribution or at any time thereafter to natural persons who or legal entities which are ‘qualified’ investors, as defined in Section 1:1 of the Dutch Act on Financial Supervision. Shares may not otherwise be offered, directly or indirectly, in the Netherlands.

No offer of any security is made hereby. Recipients of this information who intend to apply for shares in any SEI Fund are reminded that any such application may be made solely on the basis of the information contained in the Prospectus. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any stock in particular, nor should it be construed as a recommendation to purchase or sell a security, including futures contracts.

An investment in the shares of the non-EEA Alternative Investment Fund involves significant risks, including, but not limited to, limited operating history, limited liquidity, lack of control over the Fund or its investments, absence of regulatory oversight, tax risks, investment risks, risks inherent in investments in highly volatile markets, risks related to international investment, risks pertaining to various investment techniques that may be employed by the managers of the hedge fund investments, risks related to the ability to diversify investments, risks relating to a fund-of-funds structure, including multiple levels of fees and expenses, risks related to the accuracy of valuations of hedge fund investments, and conflicts of interest. The Fund has only limited operating history upon which investors can evaluate its past performance, and prior performance of the investment adviser or its affiliates provides no guarantee of the results that the Fund will achieve. In addition to the normal risks associated with equity investing, international investments may involve risk of capital loss from unfavourable fluctuation in currency values, from differences in generally accepted accounting principles or from economic or political instability in other nations. Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise. High yield bonds involve greater risks of default or downgrade and are more volatile than investment grade securities, due to the speculative nature of their investments. Narrowly focused investments and smaller companies typically exhibit higher volatility. SEI Funds may use derivative instruments such as futures, forwards, options, swaps, contracts for differences, credit derivatives, caps, floors and currency forward contracts. These instruments may be used for hedging purposes and/or investment purposes.

While considerable care has been taken to ensure the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

This information is issued by SEI Investments (Europe) Limited, 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR which is authorised and regulated by the Financial Conduct Authority. Please refer to our latest Full Prospectus (which includes information in relation to the use of derivatives and the risks associated with the use of derivative instruments), Key Investor Information Documents and latest Annual or Semi-Annual Reports for more information on our funds. This information can be obtained by contacting your Financial Adviser or using the contact details shown above. SEI sources data directly from FactSet, Lipper, and BlackRock, unless otherwise stated.