Global hedge funds suffered net outflows of $20.7bn in June, as investors pulled more of their money out despite improved performance from most managers.
After inflows in April and May, the withdrawals took total aggregate net redemptions for the second quarter to $10.7bn, according to data from eVestment, marking the third consecutive quarter in which money has left the sector. This represents the longest sequence of quarterly outflows since the second quarter of 2009, suggesting that investor dissatisfaction with managers’ performance and fees may be intensifying.
In the first three months of 2016, hedge fund redemptions were the worst seen in any quarter for seven years, as investors withdrew more than $15bn, according to data from Hedge Fund Research. Large insurers such as AIG and MetLife and pension funds including the New York City Employees’ Retirement System have all recently cut or reduced their hedge fund allocations.
However, the industry produced positive returns in June amid the market volatility surrounding the UK referendum on leaving the EU. Hedge Fund Research’s HFRI Fund Weighted Composite index gained 0.8 per cent, recording its fourth straight month of gains.
June’s redemption figures do not take into account the aftermath of the Brexit vote, however, as hedge fund investors must typically give at least one month’s notice to withdraw cash.
Popular sectors bucking the withdrawals trend in June included commodity funds, which recorded net inflows for the ninth month out of the past 10, the eVestment numbers show. Commodity-focused funds have returned 5.8 per cent this year, based on the HFR indices.
And not all investors are racing for the exits. Sovereign wealth funds, endowments and foundations — as well as some pension funds — are still adding to their hedge fund allocation.
Many have turned to hedge funds as low interest rates and high valuations in equities and fixed income markets make it harder to generate returns through conventional long-only mutual funds.
But expectations remain low: 70 per cent of managers recently surveyed by Preqin expect returns of 3 per cent or less across the hedge fund industry this year.
Many hedge funds were wrongfooted by the sharp market swings at the start of the year. HFR’s asset-weighted index fell more than 2 per cent in the first quarter before rebounding 1.1 per cent over the next three months.
This was enough to draw criticism from some investors already sceptical of a fee structure that historically charges 2 per cent a year for management plus 20 per cent of any profits.
In recent quarters, more hedge funds have shut down and liquidated than have opened. In the first three months of 2016, 291 funds closed their doors and just 206 new ones started up, according to HFR data. Last year, more hedge funds closed than in any year since the financial crisis.
Pressure from investors and the threat of redemptions have pushed managers to negotiate on their fees, especially where performance is eaten up too much by charges. They are also offering more transparency about their positions and risk profiles.
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