Asset AllocationJanuary 27, 2020

Investors Redeemed Nearly $100 Billion from Hedge Funds in 2019

It’s the second consecutive year of outflows in the industry as managers struggle to keep pace with the broader market.

Reported by Sarah Min

Investors redeemed nearly $100 billion from hedge funds in 2019, marking the second consecutive year of outflows in the industry as managers struggle to retain investors in search of alpha elsewhere, a recent study says.

Despite delivering a better-than-usual performance year, hedge funds tallied $97.9 billion in outflows in 2019, up 163% from nearly $37.2 billion the prior year, according to an eVestment report released last week. The industry last posted two successive years of redemptions in 2008 and 2009, during the Great Recession.

“The industry will likely live on as a place where the best survive and the belief in emerging stars persists,” the report read. “But 2019 also seems to have marked the point where one can no longer ignore that broadly felt success is a thing of the past.”

Deterred by high fees and hoping to reduce exposure to public equity markets, investors have been pulling money from hedge funds in favor of private equity, credit, and real assets. In an exodus, lenders are instead allocating money from hedge funds and other long-only equity strategies to external asset managers around the world, the study said.

Hedge funds have dismally lagged broader indexes. In the last 12 months, the industry posted just 7.4% in returns. That was less than one-third the showing of the S&P 500, which gained 27% over the same time period, according to Bloomberg. Meanwhile, more than 4,000 hedge funds have closed in the past five years, according to Hedge Fund Research.

Still, thanks to performance gains, there were some bright spots in the industry. While the industry posted its largest annual outflow since 2016, hedge funds last year increased assets under management by 4% to $3.3 trillion, largely due to new assets received in macro funds. In 2020, pension funds, seeking low interest rates, are also expected to increase allocations into hedge funds.

Hedge funds are not the only ones feeling the squeeze. Long-only U.S. equity strategies, which have about $7.1 trillion in assets under management, suffered redemptions of 5%. By comparison, hedge funds underwent withdrawals of about 3% of AUM.