The hedge fund industry is currently going through a transition. As investors re-evaluate their exposure to the sector, due to the high fees and poor returns, which often negate the benefits of investing in hedge funds, more funds are now closing than opening.
According to data compiled by Singapore-based Eurekahedge, so far this year there have been more hedge fund closures that launches and closures have outpaced launches for six consecutive quarters for the European hedge fund industry.
However, while more hedge funds are shutting down than opening up, Eurekahedge’s data shows that during the first half of 2016 hedge fund industry assets under management rose by $19.9 billion. For the sector as a whole during the first half of 2016, investor inflows of $25.1 billion offset performance driven losses of $5.2 billion.
It’s clear that some parts of the hedge fund industry are doing better than others. CTA/managed futures funds topped the tables across strategic mandates for the first half of 2016. On the other hand, funds of hedge funds appear to be rapidly falling out of favour with investors.
Funds of funds losing out as hedge fund industry restructures
According to Bloomberg, funds of hedge funds lost more than $100 billion during the past 12 months due to outflows and poor performance. Over the four quarters through March, clients pulled $50.3 billion from the funds while managers posted $51.5 billion in investment losses that’s according to data compiled by eVestment, which studies performance figures from more than 2,500 funds. eVestment also reports that hedge funds lost $101.8 billion in the 12 months through March because of outflows and poor performance.
A loss of more than $100 billion is significant for the funds of hedge funds sector as the industry has less than $1 trillion in assets under management. In fact, after recent investment losses and redemptions assets in the industry shrank 11% to $841.6 billion, the lowest since June 2009. The total AUM for the global hedge fund industry currently stands at $2.26 trillion and as of 1H 2016. Before the financial crisis, funds of hedge funds were the single largest investment hedge funds, accounting for almost 50% of industry assets in 2008. Today, they make up 28%. According to Bloomberg funds of hedge funds have reported net investor outflows in 16 of the last 20 quarters.
Another study, this time, conducted by Credit Suisse Group AG, which polled more than 200 allocators with almost $700 billion invested in hedge funds found that most investors pulling money from funds of hedge funds were planning on redirecting the money to other managers, rather than exiting. Only 9% of the respondents said they were planning to reinvest the money withdrawn from funds. Of the sample, 84% stated that they had made hedge fund redemptions during the first half of 2016, but most of these investors were planning to reallocate redeemed capital. Funds of hedge funds saw the largest rate of redemptions. 91% of the respondents said they had pulled money from funds of hedge funds during the first six months of 2016.