Investors in the mood to cut hedge fund exposure
Global investors are planning to cut their exposure to hedge funds in 2016, following a disappointing performance in the past year, according to a survey.
The poll data, from research group Preqin, will be met with dismay by the hedge fund industry, which had hoped volatile stock markets would encourage investors to seek alternative sources of return. It is also likely to add extra pressure on hedge fund fees.
Preqin’s survey of institutional investors showed that more are planning to cut their hedge fund holdings this year than are planning to increase them, by 32 per cent to 25 per cent.
The downbeat results, which will be published this month in Preqin’s annual report on the industry, also show that one in three investors were disappointed by returns from their hedge fund portfolio in 2015 and have less confidence in future returns than they had a year ago.
Institutions such as public pension funds have been questioning the high fees charged by hedge funds — sometimes as high as 2 per cent of assets, plus a 20 per cent cut of investment profits — for several years, but have still ploughed more money into the industry in search of returns that are uncorrelated to traditional equity and bond markets.
The size of the global hedge fund industry was assessed by research firm HFR at $2.9tn at the end of the third quarter, but the Preqin survey suggests it may be close to peaking.
A year ago, the same survey showed investors planning to increase their hedge fund holdings, by a margin of 26 per cent to 16 per cent who said they planned to reduce exposure. The balance appeared to tip in the middle of last year, when an interim poll by Preqin first showed a higher number planning to cut their holdings.
The forthcoming report comes on the heels of another disappointing year for hedge funds. Following losses in December, the industry ended down 0.85 per cent for 2015, according to HFR’s fund-weighted composite index.
Energy sector funds and those specialising in distressed debt — many of which piled into oil company bonds before another fall in the oil price — suffered some of the worst losses last year. Tech sector funds and volatility trading strategies performed best.
This was only the fourth calendar year since 1990 in which the industry has shown a negative return, according to HFR.
“Low interest rates, steep commodity losses and intense equity market volatility contributed to a challenging environment in 2015, resulting in a wide dispersion between the best and worst performing funds,“ said Kenneth Heinz, president of HFR.
“With volatility accelerating into 2016, strategies which have demonstrated opportunistic performance throughout 2015 are likely to lead industry performance.”