Hedge Fund Redemptions Slowed on Outperformance

Date: Wednesday, April 22, 2009
Author: Tomoko Yamazaki and Komaki Ito, Bloomberg.com

Hedge fund redemptions slowed in March as industry returns outperformed global benchmarks this year, according to Eurekahedge Pte.

The industry lost $136 billion in the first quarter, shrinking 32 percent from a peak of $1.95 trillion at the end of June 2008, and bringing total assets under management to $1.34 trillion, the Singapore-based research firm said in a report published late yesterday.

Net redemptions in March totaled $15.7 billion, equivalent to just 20 percent of the monthly average in the fourth quarter of 2008, according to Eurekahedge.

“There is a growing consensus that hedge-fund redemptions will bottom in June, though I’m yet to be convinced,” said Ryo Sato, who overseas hedge-fund holdings at Nipponkoa Insurance Co.’s investment department in Tokyo. “Many of the funds have reduced their positions, taking a more neutral stance so that may lead them to relatively stable performances.”

The Eurekahedge Hedge Fund Index that measures the performance of more than 2,000 funds worldwide rose 1 percent in the three months to March, beating the 12.5 percent slide by the MSCI World Index that tracks stocks in 23 developed nations.

Hedge funds suffered their worst year on record in 2008 through market losses and client withdrawals. The global index slid 12 percent last year, the worst on record since Eurekahedge began tracking data in 2000.

Tighter Regulations

Allocations into hedge funds totaled $35 billion in the first quarter, based on 72 percent of the funds reporting their March 2009 return as of yesterday, Eurekahedge said. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the prices of assets will rise or fall.

“We expect redemptions to slow further in second quarter of 2009, remain relatively flat in the third quarter,” Eurekahedge said, adding that inflows will overshadow redemptions toward the year-end. “We also believe that the notable decline in redemption pressures will help managers put a larger portion of their capital to work, which in turn will translate into better returns in months to come.”

Tighter regulations and increased transparency of the industry may also help hedge funds attract investors, Eurekahedge said.

Pension Funds

The Group of 20 leaders said earlier this month they would extend oversight to all financial institutions deemed vital to global financial stability, including “systemically important” hedge funds. U.S. Treasury Secretary Timothy Geithner said last month he wants to bring hedge funds, private-equity firms and derivatives markets under federal supervision for the first time.

“Once tighter regulations are enforced, large institutional investors and pension funds that previously allocated only a small portion of their portfolios to hedge funds due to the lack of transparency and high perceived risk, may increase their allocations,” Eurekahedge said.

Japanese pension funds are expected to make new mandates for alternative assets to diversify portfolios, a survey by JPMorgan Asset Management (Japan) Ltd. released yesterday showed. A total of 28 new pension funds are planning to increase their allocation to alternative investments, including hedge funds and private-equity funds, compared with only one that is planning to withdraw, the survey showed.

In terms of monthly performance, global hedge funds returned 1.4 percent in March, based on 65 percent of the funds reporting performances, according to Eurekahedge. Gains were driven by rising stock prices, it said.

The monthly performance compared with the 7.2 percent advance by the MSCI World Index during the month.

To contact the reporter on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net; Komaki Ito in Tokyo at kito@bloomberg.net