Hedge Funds Worst Historical Net Outflows of Capital in 2008

Date: Wednesday, January 21, 2009
Author: Hennessee Group LLC

Hennessee Group LLC, an adviser to hedge fund investors, estimates that hedge fund industry assets decreased by $782 billion in 2008 to $1.21 trillion (see chart).  The decrease in assets represents a -39% decline in industry assets since the beginning of 2008 and leaves industry assets at their lowest level since 2006. 

Preliminary results indicate that the hedge fund industry experienced net redemption outflows of $399 billion (-20%) in 2008.  The amount of redemption outflows ($399 billion) represents the largest outflow of assets in the hedge fund history and is a dramatic reversal compared to the 18% increase in inflows in 2007 of $278 billion.  The remaining $382 billion (-19%) reduction in assets was the result of negative performance, the worst since 1987.  The Hennessee Hedge Fund Index declined -19.2% in 2008.  These figures do not include assets invested in fund of hedge funds. 

“2008 was the worst year for hedge funds in both redemptions and performance since Hennessee Group Research began recording performance and assets in 1987,” stated Charles Gradante, Co-Founder of Hennessee Group.  “In addition, a number of high profile funds liquidated or froze redemptions which was a tactic historically employed by hedge funds with smaller capital bases. Compounding the matter further, the industry was hit with its largest ponzi scheme in history. “

Gradante further stated that: “Hennessee Research continues to strongly believe (since 1995 reporting) that the term “absolute return” is misleading.  Hedge funds are relative return vehicles to equity and bond markets but substantially less relative due to hedging and arbitration,” continued Gradante.  “As we have seen, returns can be negative which is not the case in the so-called “absolute return world”, concluded Gradante.  Hennessee Group encourages the industry to eliminate “absolute return” from its vocabulary. 

“Despite the challenges in 2008, hedge funds still managed to outperform their traditional counterparts by a wide margin,” noted Lee Hennessee, Co-Founder of the Hennessee Group.  “And while the industry is certainly smaller and has additional challenges ahead, we believe the industry will come out of this stronger and should remain a top priority among Investment Committees in 2009.”

INVESTOR SOURCES OF CAPITAL

Going into 2009, Hennessee Group Research finds that “Fund of Hedge Funds” represent the largest single source of capital for hedge funds at 32% of industry capital.  Of those that invest directly into hedge funds: individuals/family offices are at 30%; pensions represent 15%; endowments/foundations represent 12% and corporations represent 11%.

ASSET FLOWS

Total assets for arbitrage and event driven funds were down approximately -43% in 2008.  The Hennessee Arbitrage/Event Driven Index declined -18.6% for the year.  Arbitrage strategies were greatly affected by the massive deleveraging and volatility in the credit markets, and redemptions would have likely been greater had it not been for many funds instituting gates.   

Total assets for long/short equity funds decreased approximately –36% in 2008.  The Hennessee Long/Short Equity Index declined -18.3% in 2008.   Long/short equity funds were not immune to the massive deleveraging and suffered elevated levels of redemptions.  In addition, the liquidity profile of most long/short equity funds exacerbated redemption requests, even for strong relative performers.  Investors in need of liquidity sought capital from their long/short equity investments as their allocations to multi-arbitrage and other potentially illiquid strategies were tied up due to the institution of gates or creation of side pockets. 

Total assets for global/macro funds declined -40% in 2008.  The Hennessee Global/Macro Index fell -20.2% for the year.  Global/Macro funds with exposures to the international markets, particularly the emerging markets, suffered extreme sell-offs and endured the most redemptions within this category in 2008.