Investors yanked more than $100 billion from hedge funds in 2016, according to a new report from eVestment.
Investors redeemed $23.7 billion in December, bringing the total of redemptions for the fourth quarter to $43.2 billion. For the full year, investors pulled $106 billion from the industry.
Even with those redemptions, hedge fund industry assets soared to an all-time record high, with total industry assets finishing the year above $3 trillion.
Generally speaking, 2016 was an underwhelming year in terms of performance. The HFRI Fund Weighted Composite Index – an equal-weighted index of hedge funds —gained 5.57% in 2016, while the S&P 500, a commonly used benchmark to compare performance, was up nearly 10%.
You win some, you lose some
With nearly 10,000 hedge funds employing a variety of very different strategies (long/short, credit, risk arbitrage, macro, etc.), they’re particularly difficult to benchmark, though.
There were pockets of outperformance. There was also some significant dispersion of returns among strategies and within the same strategies.
Investors also encountered a bit of bad luck in 2016. The report found that investors would pull money from a strategy and that particular strategy would end up outperforming. Meanwhile, investors would place money in a different strategy and that one would end up posting dismal returns.
As a group, managed futures received the biggest allocations in 2016. That said, they also posted some of the most disappointing returns, the eVestment report highlights.
“Unfortunately, they [managed futures] also produced the worst average returns of any major strategy and December/Q4 redemptions reflect investors’ dissatisfaction. In the first nine months, investors added $20.0 billion into the strategy, but outflows emerged in October, and accelerated through December. After receiving the second largest allocations in 2015, and the largest in 2016, managed futures performance will likely be seen as the industry’s biggest disappointment of 2016.”
Money flowed out of event-driven strategies, but they ended up producing some of the best returns in 2016. Investors also pulled money from distressed funds, but the distressed funds were the best performing strategy of the year.
Macro funds were a particularly interesting group. The fourth quarter salvaged their returns.
“Macro funds may have also left investors scratching their heads, perhaps even more so had it not been for a fairly good Q4 by some larger products. In the end, the ten macro funds which lost the most investor money in 2016 gained an average of 6.5%, while those who gained the most new assets returned an average of 3.0%. For the three largest asset gainers, an average return of 11% in Q4 perhaps saved more than just their year,” the eVestment report said.
Texas-based hedge fund manager J. Kyle Bass, the founder of Hayman Capital, wrote in a letter this month that he’s expecting this the few years to be the “best years for macro investing since the late 1990s.” Hayman’s Master Fund posted gains of 24.8% for 2016.
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Julia La Roche is a finance reporter at Yahoo Finance.
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