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.
"Is it any great surprise that institutional investors are packing their bags and selling out?"
“Post the credit crunch, one of the things that people felt they wanted was much more security of return,” he says.
“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.
Michael Kelly, global head of multi-asset at PineBridge Investments, suggests that while it would be a mistake to “start reading the last rites” for hedge funds, those involved must be prepared to adapt to very changed circumstances.
He says: “They will need to tear down their gates, slim down their fees, and be more transparent. Finally, they will need to accept that, five years from now, I predict there will be no allocation to hedge funds.
“Should that last part of my prognosis sound suspiciously like a death sentence, fear not – it is nothing of the kind.
“In place of the hedge-fund allocation will be an allocation to a total return sector that will include the most talented of the funds merging their approach with that of managers in the multi-asset or ‘liquid alts’ space.”
He adds: “Just as multi-asset managers have sought to blend the total return mind-set, and risk-control focus of hedge funds with the advantages of mutual funds in terms of lower cost, transparency and liquidity, so the blending of these two talent pools can only deliver better returns at a lower cost.”
