Friday , 20 September 2019

Even With The Market Up By Double Digits, Hedge Funds Are Bleeding Cash

As we noted last month, even though hedge fund performance has rebounded this year, with big-name managers like David Einhorn and Bill Ackman – and even macro icons like Brevan Howard – finally putting up strong numbers, and putting several years of disappointing returns behind them, investors are still pulling money out of hedge funds and other alternative strategies at the fastest pace in years.

Per the FT, investors pulled around $56 billion from hedge funds in the first seven months of this year, marking the worst start to a year in terms of capital outflows since 2016 (despite the best stretch of performance H1 performance).

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So far this year, only 37% of hedge funds have had net inflows, according to data from eVestment published on Thursday and shared with the FT. Meanwhile, redemptions totaled $8.4 billion in July alone, though stronger returns helped soften the blow, meaning the industry’s total assets under management ticked up to $3.3 trillion. Typically, investors plan redemptions a few months, or quarters, in advance, so the pickup in redemptions this summer is likely due to the market carnage from Q4.

As usual, analysts blamed high fees and lower-than-anticipated returns for the outflow of capital.

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.

And as investors pull money from hedge funds, other ‘alternative’ strategies like private equity and private debt funds are well-positioned to benefit.

Ironically, equity funds saw the largest chunk of redemptions, despite the HFR index of equity hedge funds outperforming most other strategies during this period.

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.

But overall, HFR’s all-strategies index climbed 8% through the end of July, the best stretch of industry-wide performance since 2009. Still, as we’ve repeatedly noted in recent months, several big name funds have either shut their doors or returned outside capital, most notably David Tepper’s Appaloosa Management.

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 $1 billion and had negative performance last year were hit by $95 billion in redemptions, while those that returned more than 5 per cent in 2018 saw inflows of $51 billion.

Still, in what could be construed as a sign of the market top, just look at this chart comparing capital raised by top-performing funds during the first half of last year, compared with the first half of this year.

In other words, if hedge funds can’t stanch the bleeding when market is up 14%, imagine what might happen during a downturn or a recession?

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