Listed UK hedge funds lose two-thirds of their assets
Listed hedge funds in the UK have been “decimated” by investor outflows and fund closures since the financial crisis, causing their combined assets to fall by two-thirds since 2008.
At its peak in 2008, the listed hedge fund sector had more than £9bn in assets spread across 80 funds. That figure has fallen dramatically to just £3bn across 17 funds, according to new research from Winterflood Securities, the brokerage firm.
The concern among analysts is that further outflows and closures are imminent for the remaining companies in the listed hedge fund sector, which includes prominent investment managers such as Brevan Howard, Third Point and Highbridge.
Winterflood said: “The past few years have been dreadful for the listed hedge fund sector, which has been decimated, both in terms of assets and number of funds.”
The brokerage blamed the problems affecting the sector on listed hedge funds’ reputation for high fees, poor performance and limited transparency.
Yogi Dewan, chief executive of Hassium, a wealth management boutique, said many listed hedge funds closed down “as they have been unable to generate the same levels of returns as they did historically”.
Matthew Hose, an analyst at Jefferies, the investment bank, in London, added that “significant challenges” remain for those that have survived because they are “out of favour” with investors.
“Hedge fund fees often do not leave enough [returns] on the table for investors in a low-return environment. A lack of yield is also likely to temper investor enthusiasm for [listed hedge] funds,” he said.
Brevan Howard runs two of the largest remaining listed hedge funds, BH Macro and BH Global. Both have delivered mediocre returns since 2011, which has reduced investor demand.
Brevan Howard’s management has bought back significant numbers of the shares of both funds in an effort to boost returns and to stave off the threat of an investor vote on whether the funds should continue operating.
Kieran Drake, an analyst at Winterflood, said this tactic will only offer temporary relief. “History has shown that such buyback activity is unsustainable over the longer term in the listed hedge fund sector. Ultimately, performance needs to improve in order to renew investor interest,” he said.
The listed hedge fund sector developed to enable hedge fund managers to raise capital from wealth managers and retail clients who are unable to meet the high minimum investment threshold required for buying hedge funds.
But during the financial crisis large discrepancies emerged between the share prices of many listed hedge funds and the valuation estimates for the assets they held.
Funds that were stressed were required to hold a vote to determine whether their investors wanted them to continue operating or to wind up and return their cash.
Peter Sleep, senior portfolio manager at 7IM, the UK wealth manager, said his company no longer buys listed hedge funds as a result of these liquidity issues.
“One of the eye-opening things for us has been how illiquid some of the assets of the hedge funds have been. There are one or two cases where we are still waiting for the final assets to be sold,” he said.