Hedge funds have biggest quarterly outflows in more than 2 years
2018 was first year the industry contracted since the financial crisis
The hedge fund industry contracted for the first time since the financial crisis last year as investor redemptions accelerated and the industry lost money in volatile financial markets.
It is only the second year in more than two decades that hedge funds’ assets under management have declined. The industry has gone through a period of rapid growth, expanding from $38.9bn in 1990 to $3.1tn at the end of December, according to data provider HFR, which published fresh research on Friday.
Despite the contraction, the decline in 2018, of just over $100bn, is significantly less than the $461bn drop in 2008.
Part of the decline was due to investors pulling money from funds amid market jitters and poor performance. Outflows from hedge funds in the fourth quarter were $22.5bn, the largest level of redemptions over a quarter in more than two years. That brought the year’s outflows to $34bn — roughly 1 per cent of the money managed by the industry. Last year was only the fourth in more than two decades when more money was pulled than invested in the industry.
Investor redemptions, which forced hedge funds to sell investments to raise cash, were a major contributor to the turmoil that wracked markets in December, according to Larry Fink, chief executive of BlackRock, the world’s biggest asset manager.
In an interview with the Financial Times this week, Mr Fink likened the period to a “mini 2008-2009 . . . We saw a massive amount of deleveraging” from hedge funds.”
While there have been two other years since 2008 when outflows outpaced new money invested in the industry, performance gains previously swelled hedge fund coffers, leading to record levels of assets under management each year.
The industry’s performance failed to make up the difference last year, however. Hedge funds had their worst year in seven in 2018 as the market turmoil in the fourth quarter caught many off-guard. HFR’s main index, which monitors funds across strategies, was down 4.5 per cent last year after falling 5.8 per cent in the fourth quarter.
Still, hedge funds also beat the S&P 500 index for the first time in a decade, bolstering their argument that they perform better during down markets.
The biggest outflows in the fourth quarter came from a handful of firms, according to HFR. About two dozen funds saw redemptions of more than $500m in the quarter, including several that closed down. At the same time, about a dozen firms also received net inflows of more than $500m.
The largest chunk of redemptions in the fourth quarter came from equity hedge funds, the largest strategy in the industry, which suffered outflows of $16.8bn. Event-driven funds, which include distressed, restructuring and special situations strategies, gained new investments of $6.4bn.
“Hedge fund outflows in Q4 were driven by several factors, most notably investor reaction to steep losses in traditional asset investments and the sharp spike in equity market volatility leading to redemptions,” said Kenneth Heinz, president of HFR.