ANALYSIS: The beginning of the end for hedge funds?

Added 21st September 2016

It’s the big divorce that is the talk of today’s headlines – yes, investors have fallen out of love with hedge funds.

ANALYSIS: The beginning of the end for hedge funds?

The split has prompted major discussion in newspapers and social media – the FT today says investors pulled nearly $10bn (£7.7bn, €8.9bn) from multi-strategy hedge funds in the three months to July, while eVestment reported outflows of $25bn in July, the sector’s largest monthly redemption since the credit crisis.

After a volatile relationship, is it any great surprise that institutional investors are packing their bags and selling out? Poor performance and increased scrutiny of fees makes for a lethal combination.

It is also clear that this is having a knock-on effect on their close cousins in the retail absolute return space, many of which are also failing to live up to their implied promise of protecting against loses, or at least offering adequate diversification from the major asset classes.

David Miller, executive director at Quilter Cheviot, suggests an irony in that the creation of the absolute return sector was in some ways a consequence of hedge funds failing to deliver during the tough times in 2008-09.

“Post the credit crunch, one of the things that people felt they wanted was much more security of return,” he says.  

"Is it any great surprise that institutional investors are packing their bags and selling out?"

“They had been damaged by the market setback and fall in value of things that had been presented to them as low risk. The move was towards security and that’s what created the absolute return focus and sector.”

Miller explains that while markets have rallied, the hedge and absolute return sectors have not produced particularly good returns because the cost of insurance is extremely high in a period of low volatility.

“The costs of providing that certainty has gobbled up a significant proportion of the upside,” he remarks.

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Gary Shepherd

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Portfolio Adviser

Gary joined Last Word Media in 2009, becoming editor of Portfolio Adviser a year later. Previously, he worked at Incisive Media with roles across its Professional Adviser, Investment Week, Bloomberg Money and Mortgage Solutions titles. Gary has been shortlisted for various awards, winning Headline Money Investment Writer of the Year in 2010.

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