Investors Pull Out $28B Hedge Fund In 3 Months
Hedge fund has been decreased as investors pulled out a gross amount of $28 billion of it. It has been a bruising year for hedge funds. Big bets have been disastrous, investors have voiced discontent and some managers have been forced to rewrite their playbooks or call it quits.
And now, there is new data to rub salt into the industry's wounds: Over the last three months, investors pulled $28 billion out of hedge funds, according to the research firm Hedge Fund Research. It is the biggest quarterly outflow of dollars since the depths of the financial crisis in 2009.
So far this year, more than $50 billion has flowed out of hedge funds - much of that from the industry's biggest and best-known hedge funds, Hedge Fund Research said in its latest industry report, released on Thursday.
Among this year's biggest losers are firms tarred in recent months by scandal.
In June, the multibillion-dollar hedge fund Visium Asset Management told investors it would wind down after several employees were charged with insider trading and with conspiring to inflate the value of certain stock positions to extract a bigger payout from investors. One of the employees, Sanjay Valvani, was found dead in an apparent suicide one week after the charges were leveled against the firm.
Leon G. Cooperman, the acerbic 73-year-old founder of the hedge fund Omega Partners, made news in September when the Securities and Exchange Commission charged him and his firm with insider trading. He has denied the charges. Nevertheless, New Jersey's State Investment Council said this month that it would redeem $62 million from the firm as part of a broader move to pare back hedge fund investments.
And Daniel S. Och, the founder of the $36.9 billion Och-Ziff Capital Management, was forced last month to pay $2.2 million to settle record-keeping charges related to a federal bribery investigation. Och-Ziff's Africa unit pleaded guilty to paying more than $100 million in bribes to African officials.
The firm, which informed investors in 2014 that the government was investigating it over questions of bribery, said in August that it had seen $5.5 billion walk out the door this year alone. This month, New Jersey said it would pull $190 million from Och-Ziff.
But it's not just regulatory action that has irked hedge fund investors.
Performance across the industry has been mediocre for years. The Hedge Fund Research Composite Index, the broadest gauge of hedge fund performance, lags the Standard & Poor's 500-stock index so far this year, with a 4.14 percent gain compared with the index's 8 percent gain.
Over the last year, some categories of hedge funds have consistently made wrong-footed bets, and the outlook has become so dire that the billionaire hedge fund manager Daniel S. Loeb told his investors this year that "we are in the first innings of a washout."
The prominent investor William A. Ackman has become an example of how quickly the fortunes of hedge fund titans can be reversed. Just two years ago, his Pershing Square Holdings finished the year with a 40 percent gain. But it lost 20.5 percent last year and is down 22 percent so far this year.
The nation's largest state pension fund, California Public Employees' Retirement System (Calpers), sounded an alarm in 2014 when it announced that it would eliminate its entire hedge fund portfolio over concerns that those investments were too complicated and expensive.
While Calpers's hedge fund holdings were small - just $4 billion compared with the $300 billion that it managed at the time - the move sent ripples across the hedge fund industry, prompting other public pensions to question their own investments.
Since then, public pension funds and insurance companies have withdrawn their money at a rapid pace. This month, the Kentucky Retirement Systems voted to exit hedge funds over the next three years. The New Jersey State Investment Council also announced plans this month to pull nearly $2 billion from 11 hedge funds. MetLife, the New York City employee pension and the American International Group have recently started asking hedge funds for their money back, too.
Under pressure, hedge funds are cutting more favorable deals for investors who stick around, a remarkable development in an industry that is known for minting billionaires overnight.
For decades the industry operated on a model known as "2 and 20," which meant that investors paid fees of 20 percent of any gain in a year and 2 percent of assets under management. To keep investors from jumping ship, managers are beginning to reduce fees in exchange for locking up money for longer periods of time. In some cases, hedge fund managers have promised not to charge any fees until they surpass a performance target.
In another sign of trouble for the nearly $3 trillion hedge fund industry, the pace at which hedge fund managers open new shops has slowed, according to the research firm Preqin.
Despite the flood of negative news, some industry experts argue that investors are fleeing the industry at a time when the industry could still make a comeback.