Hedge funds under siege

The past year could be characterized as a year in which the unexpected happened, with perhaps the Brexit result and Donald Trump’s triumph in the U.S. presidential election the pinnacle of a series of unpredicted events. As markets struggled to respond to these surprising outcomes, volatility increased and hedge funds, following two years of returns below 5%, were able to capture some upside, adding 7.4% during the course of 2016.

However, despite hedge fund performance as a whole being well within the targeted range of most investors, 2016 may well be remembered by hedge fund managers as a difficult year, with a net $110 billion of investor capital being redeemed over the year (see “Race to the exits,” below). 

Even the largest hedge funds were unable to survive the wave of redemption requests that swept through the industry in 2016. For instance, Perry Capital, which had assets of $15 billion at its height, was forced to shut up shop in September following significant investor withdrawals and poor performance.

It was, perhaps, the announcement of withdrawals from several of the largest investors in hedge funds – New Jersey State Investment Council, NYCERS and Metlife Insurance Company, to name a few – that characterized the reasons behind the wider redemptions in the industry. Many of these large institutions cited performance concerns and the high fees as the leading reasons driving their decisions to reduce their exposure to hedge funds. Institutional investors queried in December 2016 revealed that the return expectations of two out of every three investors had not been met in 2016, and 73% and 64% of investors stated performance and fees respectively as the leading issue in the industry today (the largest proportions by some margin, see “Unsatisfied customers,” below). 

To counter these concerns, 2017 may be a year for managers to continue to build on the solid returns of 2016 in order to demonstrate their worth in terms of performance, as well as to focus on the value they provide investors by re-evaluating the terms and conditions on their funds.

It wasn’t all bad news in 2016

Looking beyond the headline figures, there are some bright spots. Firstly, the industry grew as a result of the performance gains made in 2016. Today, collectively, hedge funds manage assets in excess of $3.2 trillion – the highest on record (see “Inside the numbers,” below). Managed futures had a successful 2016 in regards to fundraising. Commodity Trading Advisors (CTA) built on the $25 billion they raised in 2015, and added a further $17 billion in fresh capital in 2016, taking the size of the CTA sector to $240 billion. The one drawback to this is many see managed futures as a competing assets class to hedge funds and not a subsector of it. 

In addition, many investors continued to make new investments, or began investing in hedge funds for the first time. Among these was the National Pension Service of South Korea, which made its first investment in hedge funds in July 2016, investing more than $900 million in the asset class. 

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