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Investors Pull More Money Away From Hedge Funds

Date: Wednesday, September 12, 2012
Author: Reuters

Investors took more money away from hedge funds in July when they asked for $7.4 billion back, underscoring their frustration with an industry that has long promised to make money in all markets but is currently delivering only middling returns.

July's redemption requests were up sharply from the $4.2 billion pulled out in June, according to data released by BarclayHedge and TrimTabs Investment Research on Tuesday [Sept. 11]. That leaves hedge funds industry assets at roughly $1.87 trillion, down 23 percent from their peak four years ago before the financial crisis hit, the research report found.

"We've seen a notable reversal in hedge fund industry fortunes during the past year," said Sol Waksman, founder and president of BarclayHedge.

This is troubling news in an industry dwarfed in size by the mutual fund industry but able to attract some of the world's savviest investors with the promises of big paychecks and more investing freedoms. Similarly big name investors including pension funds and wealthy individuals have long been attracted to hedge funds because their managers can short, or bet against a security, thereby having more tools at their disposal to deliver better returns.

But performance has been less robust and investors have been quicker to pull out.

In the year from August 2011 to July 2012, hedge funds reported outflows in seven out of 12 months, marking a stark contrast to the previous year, when the industry boasted inflows in 10 out of 12 months and took in $976.2 billion.

Investors' patience is clearly wearing thin as returns failed to recover dramatically this year after last year's roughly 5 percent loss.

In the first seven months of 2012, the Hennessee Hedge Fund Index returned 3.82 percent while the main stock market index, the Standard & Poor's 500, climbed 9.7 percent.

Even strategies that are performing well were not immune from redemptions with investors asking for $188 million back from fixed income funds even as these types of portfolios returned 6.17 percent on average, posting some of the industry's best returns.

After years of giving managers lots of time to let their strategies work, investors are more worried about having to pay hefty fees but getting only lackluster returns. Managers often take 20 percent of the gains and add on another 2 percent management fee, far more than mutual funds, which generally charge only a management fee.

Some high profile managers are among the funds struggling to deliver strong returns this year amid volatile market conditions shaped by Europe's ongoing debt crisis, fears about new market regulation, health care costs and the outcome of the U.S. presidential election.

Louis Bacon's Moore Global Investors Fund was up only a smidgen through late August while Paul Tudor Jones' Tudor BVI Global Fund was up about 3 percent through last August, according to data released to investors.

There are some stars on the horizon, however, including industry veteran Lee Ainslie, who is staging a dramatic turnaround with his fund up 20.12 percent through the end of August after having fallen 14.8 percent last year, numbers released to investors show.