Investors pulled $21 billion in June from hedge fund managers, with those most impacted falling in the equity long / short category, a Bloomberg Brief report pointed out. With hedge funds in a drawdown, now is that time that “cubs” are emerging from under the wings of larger managers to set up their own funds, fund of funds manager Protégé Partners observes, who looks to niche strategies to find noncorrelation.
Long / short equity funds hardest hit by asset outflows
Long / short equity funds were the hardest hit by the hedge fund withdrawal, with just under $10 billion being subtracted from their assets under management, an eVestment report noted. Macro, Event-Driven, Broad Multistrategy and Directional Credit all witnessed near $3 billion in funds being withdrawn. Market-Neutral Equity, Managed futures and Relative-Value Credit strategies were among those that saw slight gains.
The move represented one of the largest non year-end outflows since 2009. “What made redemptions from the industry in June different than all other months of 2016 was that it was the first month of 2016 when large funds that performed well in 2015 had aggregate redemptions,” the report said. “This is an indication that as redemption pressures from poor 2015 performance appeared to abate in April and May, negative sentiment related to 2016 performance may be rising.”
A separate Hedge Fund Research tally said hedge funds lost $8.2 billion in the second quarter, which is 46% less than the prior quarter.
The asset increase “was driven by strong quantitative CTA gains on Brexit Friday and broad-based industry wide gains across equity, commodity and currency markets pursuant to the Brexit dislocations,” HFR President Kenneth Heinz said in the report.
Among the funds doing well in June performance included Incline’s Tahoe Fund, up 9.5% on the month, Renaissance Institutional Diversified Alpha and Institutional Equities, up 6.6% and 4.6% respectively, Abraham Trading Diversified, up 2.6% and Baupost, which was up 1.3% on the month.
Fund of funds manager who seeds new hedge fund managers finds market environment appealing
Michael Weinberg, chief investment strategist at the $1.8 billion Protege Partners, finds the environment appropriate for their strategy.
The fund of funds manager generally invests in new funds that have spun out from some of the world’s top hedge funds. Weinberg, in an interview with Bloomberg Briefs, pointed out they recently seeded former Baupost managing director, Miguel Fidalgo, who launched the hedge fund Triarii. Past investments included portfolio managers who worked at Pershing Square, Och-Ziff and Julian Robertson’s Tiger Management.
“It’s not the size of the fund where the manager comes from, it’s more about the pedigree and industry perception of that manager,” he said. “We believe these managers have learned from the world’s best managers. They are often younger and hungrier, and looking to prove themselves and ideally generate outsized returns for themselves and their clients.”
In the current environment where performance has languished, Weinberg finds opportunity.
“Because last year was a tough year and many of the larger, well-established funds had a difficult time, it provided a good opportunity for the next generation to spin out because they weren’t leaving as much on the table,” he said. “If the firm is down, there’s not as much of a bonus pool to pay managers. So it’s an opportune time to cut the cord and transition to running their own firms.”
Weinberg allocates to three or four hedge funds per year, with $50 to $70 million a typical allocation. He currently sees opportunity in Asian long short equity and credit, as well as global long short strategies. “We’re particularly interested in Europe because Brexit will create an opportunity set there.”
On a micro focus, he likes arbitrage strategies, hedged quant strategies, sector-specific strategies that enter niche markets like weather, energy and electricity trading or reinsurance, fixed-income relative value arbitrage strategies. “Our view is each of these strategies is market independent and if you take a bunch of them and put them together in a portfolio, you end up with a portfolio that has almost no correlation to the equity and credit markets.”