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.
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.”
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Tags: CalPERS, Commodities, Hedge Funds, multi-strategy, Nasdaq eVestment, outflows, performance, S&P 500