Investors pulled a record $155 billion out of hedge funds last year, punishing the once red-hot asset class for delivering its worst-ever returns, according to numbers released on Wednesday.
Hedge funds around the world now manage an estimated $1.4 trillion, the same sum they managed in 2006 and far less than the $1.93 trillion they invested in the middle of 2008, Chicago-based tracking firm Hedge Fund Research (HFR) said. This is only the second time since 1990 that the exclusive and often secretive hedge fund industry suffered net outflows for the full year, HFR said.
Consulting firm Hennessee Group, which also tracks performance and asset flows, said last year was the worst for the industry in terms of performance and redemptions since 1987.
HFR reported that investors simply wanted their money back last year, paying little attention to the size of the hedge fund they were invested with, its particular strategy, or how the hedge fund was performing. “Investor risk aversion remained at historically extreme levels through year end, even as implied and realized asset volatility moderated,” HFR president Kenneth Heinz said in a statement.
At the end of the year many hedge fund firms, including industry powerhouses Tudor Investment Corp and Citadel Investment Group, took an unusual step and told their investors they could not get their money back just yet as they suspended redemptions. Despite many managers’ promises to make money in all markets, the average hedge fund lost 19% last year, marking the industry’s first full year loss since 2002 when the average fund slipped 2.9%, Hennessee Group data show.
Hedge funds can sell securities short and use leverage, trading techniques that are off limits at most other portfolios. “2008 hedge fund losses were widespread, with 70% of the funds that report to us ending the year in the red,” said Sol Waksman, founder and president of BarclayHedge, another industry research group.
As a group, hedge funds outperformed the average stock mutual fund’s 38% drop, but many of the industry’s stars suffered losses far steeper than the average 19% decline, investors and managers said.
Faced with a worsening financial crisis, the collapse of investment bank Lehman Brothers and gyrating stock markets, and steeper hedge fund losses, wealthy individuals and many endowments and some pension funds raced for the exits in the Q3. They stepped up their calls to exit in the Q4, pulling out $152 billion in the last three months alone, HFR data show.
Investors added $16.5 billion in the Q1 of 2008 and put in another $12.5 billion in the Q2. In the Q3, they pulled $31.7 billion out, HFR data show. Hedge funds, unlike most mutual funds, lock up assets for months and sometimes years, often requiring their investors to give 45 days’ notice before getting their money back. (Reuters)