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Global hedge fund capital drops amid record outflows

Global hedge fund capital fallsA combination of record redemptions, poor performance and surges in market volatility produced a large decline global hedge fund capital in the final quarter of 2018.

According to the latest HFR ‘Global Hedge Fund Industry Report’, investors redeemed an estimated $22.5 billion during the period and this was the largest quarterly outflow since the last quarter of 2016 and equivalent to 0.7% of industry capital.

The largest outflows were concentrated in a number of firms which closed their funds – more than 20 firms saw net asset outflows of more than $500 million in the quarter.  

In terms of strategies, the majority outflows were in equity hedge strategies ($16.8 billion) while event-driven strategies actually saw inflows of $6.4 billion.

Equity hedge funds also suffered from the poorest performance. The HFRI Equity Hedge (Total) Index fell by 8.3% in the quarter while the HFRI Equity Hedge Index (Asset Weighted) fell by 5.9%, bringing 2018 performance to a decline of 6.9% and 5.9% for the respective indices.

Kenneth J. Heinz, president of HFR, said the biggest contributor to the increase in hedge fund outflows was investor reaction to steep losses in traditional asset classes and sharp spikes in equity market volatility.

However, Heinz also noted that the outflows were mainly orderly, manager-initiated returns of investor capital, representing “a stark contrast from the panic-driven redemptions” during the 2008 financial crisis.

Furthermore, stated Heinz, some positive trends including in macro, commodity-trading advisors and the relative outperformance of larger funds, offered investors some positive news.

“While the overall investor flows and performance trends were negative, it is likely that discriminating institutional investors which experienced or observed areas of strong performance through the most difficult equity and commodity trading environment in a decade will factor these positive dynamics into portfolio allocations for 2019,” said Heinz.

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