Hedge funds suffered more than $40bn of investor withdrawals last year even though the industry delivered its best annual performance for a decade.
Hedge funds returned 10.4 per cent, net of fees, in 2019, according to the data provider HFR, well below the 31.5 per cent return posted by the S&P 500, the main US equity benchmark.
Hedge fund managers frequently complain that the S&P 500 is an inappropriate performance yardstick given the variety of their strategies that invest across a wide range of asset classes globally.
But the industry also failed to match the 16.6 per cent return delivered by a 50/50 global equity bond index.
Years of underperformance by hedge funds since the 2007/08 financial crisis have prompted institutional investors to reduce their exposures to the products.
Investors withdrew $43bn from hedge funds last year, up from $38.3bn in 2018 and taking net withdrawals over the past four years close to $142bn, according to HFR.
Peter Laurelli, global head of research at eVestment, another data provider, said that poor performance in 2018 had significantly influenced allocation decisions in 2019.
Prominent managers that suffered heavy losses included $800m Horseman Capital, run by Russell Clark, a media-shy Australian. The Horseman Global fund was down 32 per cent by December 4, according to a report by HSBC.
New York-based RG Niederhoffer Capital Management, one of the world’s oldest computer-driven hedge funds that is led by the opera aficionado Roy Niederhoffer, suffered a 30.3 per cent loss in its flagship Diversified fund by December 11.
The $2bn Quantedge Capital global fund was among 2019’s top performers with net returns of 63.6 per cent by the start of December. The high risk fund lost 29.2 per cent in 2018 and was the worst performer that year in the sample of more than 400 funds tracked by HSBC.
Crispin Odey’s European fund finished the year down about 10 per cent, marking a partial recovery after losses in September when bets on sterling and oil prices soured.
Odey’s European fund delivered a 53 per cent return in 2018 and was the best performer for that year in HSBC’s sample. These violent reversals emphasise the volatility of hedge fund performance that many investors find unpalatable.
Don Steinbrugge, founder and chief executive at Agecroft Partners, a Virginia-based consultancy, said any new inflows would continue to concentrate into a small group of managers in 2020, leading to further fund closures.
“I expect 5 per cent of [existing hedge] funds to attract 80 to 90 per cent of the net new assets,” said Mr Steinbrugge.