Investors pull money from hedge funds at fastest pace since 2016
Rebound in returns this year has not stopped clients punishing managers for weak 2018
Investors pulled around $56bn from hedge funds in the first seven months of this year, the worst start for fundraising since 2016 despite the best stretch of performance in a decade for the struggling industry.
Only 37 per cent of hedge funds have had net inflows so far this year, according to data from eVestment published on Thursday. Redemptions totalled $8.4bn in July alone, though the rebound in returns meant the industry’s total assets under management ticked up to $3.3tn.
Redemptions, which are often allowed monthly or quarterly from hedge funds, were spurred by low returns in the last quarter of 2018 when funds were caught off-guard by market turmoil.
Investors are “souring on disappointing returns or returns that don’t meet expectations for the cost they’re paying,” said Peter Laurelli, the head of research at eVestment.
As investors pull back from hedge funds, the beneficiaries are often private equity and private debt funds, which are sitting on record levels of unspent cash.
Redemptions were highest in hedge funds that bet on stocks, which lost $25.5bn to outflows in the year to July. Those funds are the best-performing major strategy this year. The HFR index of equity hedge funds was up 9.8 per cent at the end of July, but that was still less than half the 20 per cent rise in the S&P 500 over the same period.
Macro and managed futures funds also suffered more than $10bn each in redemptions. Event-driven funds, which include distressed, restructuring and special situations strategies, had inflows of $10.3bn, but even there investors were choosy: more funds had outflows than had inflows.
In terms of investment performance, hedge funds have had their best start to the year since 2009. HFR’s all-strategies index was up 8 per cent at the end of July. Returns have been boosted by surging stock and bond markets, while macro funds — which make big geographical and asset class bets — did well on trades around lower US interest rates and the escalating trade war between the US and China.
“It is the best returns the industry has broadly seen in almost 10 years, but it is still below an equal-weighted equity and bond benchmark, so I don’t know that the assumption should be there will be a general turnaround to the industry,” said Mr Laurelli. “We’ve seen a lot of high-profile fund closures over the past couple years, and I can’t see any reason why that wouldn’t continue.”
There were clear signs in the eVestment data that investors were reacting to last year’s weak performance in their allocations, rather than planning for which strategies might do well in the coming months.
Funds that managed more than $1bn and had negative performance last year were hit by $95bn in redemptions, while those that returned more than 5 per cent in 2018 saw inflows of $51bn.