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Risk

Hedge Funds Continue to Lose Investors

February, a bellwether month for the asset class, did not bring any relief, a Nasdaq eVestment study finds.

By Larry Light



Poet T.S. Eliot wrote that April is the cruelest month. But for hedge funds in 2023, that distinction belongs to February, which has long been the biggest month for net investment inflows. How the second month fared has been a harbinger for the rest of the year.

This February, investors yanked an estimated $4.83 billion from hedge funds, according to a study by Nasdaq eVestment, the exchange’s research arm. This marked the first February since 2009, during the financial crisis, that flows were negative.

“No matter how you want to frame it, the data for February makes it hard to believe that this year will be a net positive one for capital raising around the [hedge fund] industry,” the report stated.

Hedge funds clocked a sizable $112 billion outflow for all of 2022 and have kept on leaking investments this year. To be sure, the hedge industry still has a large corps of investors, with $3.4 trillion under management.

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A large part of the recent outflows owes to hedge fund performance: Overall, they were in the red, by 1%, for February. That showing was not as bad as the S&P 500’s minus 2.2%, but the goal of hedge operators is that they will cushion investors when equities do poorly—and also many investors expect hedge funds should do better than stocks in good times (which hedge chiefs say they don’t promise, insisting that they only seek to offset volatility). The hedge industry’s popularity suffered in the bull market that ended at the start of 2022, when the S&P 500 easily outpaced hedge funds.

In terms of inflows, the most popular hedge sector in February was multi-strategy, which, as the name suggests, is the most diverse. This group gained $730 million, a relatively paltry record compared with the February average for the segment, $4 billion, stretching back over the 14 years this survey has been taken.

The strategy with the strongest inflows has been managed futures, which deftly navigated the ever-fluctuating commodities field. With a 9.65% positive performance last year, managed futures handily outpaced other strategies—and thus had the biggest 2022 inflows. In February, for the first time in a while, it had outflows, which eVestment attributed to profit-taking.

In addition to disappointing investment returns, hedge funds’ high fees have been a turn-off for institutional investors for some time. The California Public Employees’ Retirement System, the largest U.S. public pension fund, famously dumped its entire $4 billion in hedge funds in 2014, citing lofty fees as a chief reason. Hedge funds’ share of public pension assets shrank to 5.8% in 2021 from a peak of 7.1% in 2018, according to Public Plans Data.

One possible bright note for hedge operators is that CalPERS is considering returning to the hedge world. New CIO Nicole Musicco said on Bloomberg TV in January that CalPERS was reviewing its position on the asset class. A spokesman for the pension program adds that this is just a possibility, and “there are no current plans.”

Related Stories:

Investors Removed $111 Billion From Hedge Funds During 2022

Which Hedge Funds Will Do Best With Rates Rising?

Too Much Leverage, Too Much Risk Are Weighing Down Hedge Funds

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Home > News > Regulation > Congress, SEC Move Forward With Electronic Disclosure
Regulation

Congress, SEC Move Forward With Electronic Disclosure

Congress has proposed allowing electronic disclosure to investors for SEC registrants, and the SEC is looking to require it for disclosures to the SEC itself.
By Paul Mulholland


Proposed legislation, the Improving Disclosure for Investors Act, would require the Securities and Exchange Commission to allow certain registrants to send electronic disclosures to investors instead of paper disclosures. The bill aims to build off an SEC proposal which would require certain registrants to submit disclosures to the SEC electronically, but not to investors.

The bill was proposed yesterday by Representative Bill Huizenga, R-Michigan, and is co-sponsored by House members Bryan Steil, R-Wisconsin; Jake Auchincloss, D-Massachusetts; and Wiley Nickel, D-North Carolina.

A spokesperson for Huizenga’s office confirmed that the primary difference between the legislation and the SEC’s rule proposal is the legislation applies to disclosures to investors, whereas the proposal applies to disclosures to the SEC.

If passed, the bill would require the SEC to create rules that allow, but do not require, investment companies, business development companies, brokers, dealers and municipal securities dealers to disclose their prospectuses, semiannual and annual reports, account statements and proxy statements to their investors electronically.

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The bill would require the SEC to issue rules that provide for an initial paper communication informing the investor of the electronic delivery and an annual paper notice for two years informing them of their right to opt out of electronic delivery. The SEC would also be charged with requiring the registrant to enact policies to identify and fix failed electronic disclosures and provide a mechanism for opting out.

If the SEC did not make regulations to this effect within one year of the bill’s passage, the law would take effect anyway, and covered entities would take the law as written for guidance on electronic disclosure.

According to a press release from Huizenga’s office, “the SEC currently permits electronic delivery of certain documents under the federal securities laws,” but this process is “opt-in” rather than opt-out.

The SEC Proposal

Last week, the SEC proposed requiring certain registrants to file disclosures to the SEC using the electronic EDGAR system. According to the SEC’s press release:

“The proposed amendments would require the electronic filing, submission, or posting of certain forms, filings, and other submissions that national securities exchanges, national securities associations, clearing agencies, broker-dealers, security-based swap dealers, and major security-based swap participants make with the Commission.”

The comment period for this proposal will stay open until May 22 or 30 days after its entry into the Federal Register, whichever is later.

SEC Chairman Gary Gensler said in a statement that the proposal “would require entities under the Exchange Act to file electronically a range of annual and quarterly forms currently filed in paper. For example, brokers and other filers would need to submit electronically their annual audit filings and risk assessment reports. Streamlining the Commission’s filing and processing, this also would help us more quickly analyze filings to ensure compliance with Congress’s laws and our rules.”

SEC Commissioner Mark Uyeda supported the proposal and invited public comments on its specifics, saying, “The list of rules and forms affected is long and the Commission may not have gotten this transformation exactly right. For that reason, the assistance of investors and other stakeholders in providing us with their comments will be important.”

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