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Hedge fund gains fail to offset record FoF withdrawals

Date: Wednesday, April 22, 2009
Author: Hedgeweek.com

Investors continued to withdraw capital from hedge funds in the first quarter of 2009, redeeming nearly USD104bn, according to data released by Hedge Fund Research, a hedge fund industry data provider.

The USD104bn redemption figure amounted to 7.4 per cent of industry assets, but did not exceed the record for a quarterly withdrawal set in 4Q 2008, when investors withdrew over USD152bn from the hedge fund industry.

Indicative of continued investor pressure, withdrawals from the fund of hedge funds industry totalled USD85bn for the quarter, exceeding the 4Q 2008 redemption total of USD50bn, and accounting for the majority of capital withdraw from the total hedge fund industry.

Funds of hedge funds, which experienced a record performance decline of -21.3 per cent in 2008, posted a performance gain of 0.47 per cent in the first quarter, in line with overall industry performance.

Partially offsetting the industry asset decline, the HFRI Fund Weighted Composite Index posted a gain of 0.53 per cent for the quarter, resulting in a performance-based gain for the industry of approximately USD28bn. This figure is in sharp contrast to the performance-based losses of more USD162bn which occurred in 4Q 2008, during which the HFRI Fund Weighted Composite lost over nine per cent.

Total hedge fund industry capital declined to USD1.33trn as of the end of 1Q09, USD600bn below the industry asset peak at the end of 2Q08 and USD75bn below the year-end 2008 asset total.

Capital invested in funds of hedge funds declined to just over USD525bn, USD300bn below its peak, also achieved at the end of 2Q08 and USD68bn below the year-end 2008 level.

Investor withdrawals by strategy continued to exhibit a lack of sensitivity to strategy performance, as USD16bn was withdrawn from macro strategies, an area which gained nearly five per cent in 2008. Investors also withdrew USD27bn from relative value strategies, a strategy which posted a gain of nearly 4.5 per cent in the first quarter.

The strategy that experienced the largest capital redemption was equity hedge, which had USD35bn of capital withdrawals, despite posting a gain of nearly three per cent in March, the strategy's strongest month since October 2007.

'Extreme investor risk aversion subsided into the end of the first quarter, but remained at elevated historical levels as industry consolidation continued through quarter end,' says Kenneth J. Heinz, president of Hedge Fund Research (pictured). 'In addition to performance, investors are focused on structure and transparency, and the industry is in the process of evolving to meet these demands.'