Big winners in 2023 were commodities and macro funds with median returns of 12.99% and 10.75% respectively. The outperformance of these two strategies against the industry as a whole’s negative 3.5% performance will continue to catch tailwinds from Jerome Powell’s relentless rate increases, and continued price stickiness across the spectrum of commodities.

We all expect the rate increases to continue for at least the next 2 to 3 quarters and few see a quick pullback in inflation, thus fueling continued outsized returns in both strategies for ’23. The looming question is where does that land our economic growth as the tightening of financial conditions works its way through all facets of the economy, especially the employment sector. Do we see a soft landing, and what does that look like? The vast majority of managers we speak with share the view that a recession of some sort is due in 2023, with the differences of opinion varying widely as to its magnitude and its effect on fund flows.

So that begs the second question. Given these economic headwinds, what strategies will investors flock to in ’23 in addition to macro and commodity funds?  What opportunity gaps have these economic headwinds  created in the investment space, and which managers are poised to take of advantage of them?  First one that comes to mind is the private credit space. We all know that the tightening financial conditions are making it more difficult for private companies to borrow, and with $1.2T of AUM already under management and an additional $400B in dry powder available, it would seem an ideal opportunity for managers to scoop a wide array of emerging special opportunities in this ever-growing asset.

The challenge for fund raising, as is true in every strategy, still remains for smaller fund managers or new entrants, as the asset class is increasingly dominated by larger funds. As of this writing, for the first time in a decade, the top ten private debt funds represent half of all capital raised so far this year. Further illuminating this trend, Bloomberg recently reported that Ares Management Corp., Arcmont Asset Management and Carlyle Group Inc. are currently marketing large funds. That follows mega raises earlier this year by Goldman and Blackstone that accounted for 50% of the $172B raised in the first nine months of 2022. It would be helpful to see a platform emerge that could facilitate smaller and mid size funds marketing efforts into the institutional space to level this playing field. Until that occurs consolidation among the big players likely continues.

Investor inflows and outflows is always a fun guessing game among participants in the industry this time of year. The real data will start to provide us insight as we near the end of the first quarter.