For hedge funds, 2016 was the best of times, and the worst of times, as the industry reached record levels of assets under management - and investor disappointment.
Hedge funds reported gains of 7.4% for the year, which was its best showing in three years, and reached a record $3.22 trillion in total assets under management, according to Preqin’s 2017 Global Hedge Fund Report.
But at the same time, there were net outflows $102 billion, and a record 66% of hedge fund investors said that their portfolios had performed below their expectations for the year.
“Hedge fund managers are likely to remember 2016 as a difficult year for the industry,” said Amy Bensted, head of hedge fund products for Preqin, which provides data and information on the alternative asset industry.
And even more investor capital is expected to be redeemed in 2017, as 38% of investors plan on reducing their hedge fund exposure this year, while only 20% plan on increasing their exposure, according to the report.
“There could be a plateauing, or even a contraction of the industry in terms of size in the next couple of year,” said Bensted.
One of the main reasons many major investors are being turned off of hedge funds is because of concerns over high fees. Bensted said the industry needs to “address issues over fees in order to win back the growing group of investors skeptical of the value of the asset class.”
Although hedge funds had their largest gains in three years, their performance in recent years – or lack thereof – has also been cited as a factor that’s putting off potential investors. The report found that the proportion of hedge funds delivering positive annual returns has declined sharply since 2014. In 2014, approximately 80% of hedge funds added gains during that year, while only 49% of funds show positive returns in 2016.
The report also said that the largest public pension funds with the most money allocated to hedge funds were ABP of the Netherlands, which has $19.5 billion invested in hedge funds, Canada’s CPP Investment Board, which has $13.5 billion in hedge fund assets, and South Korea’s National Pension Service with $923 million.
Preqin said that at the start of 2017, investor dissatisfaction with hedge funds remains high, and that the pace of capital redemptions has been accelerating. However, many fund managers said they’re confident returns for this year will surpass those of 2016.
However, “if outflows continue in 2017,” said Bensted, “we may continue to see a shakeout of those funds that have failed to meet investors’ return expectations in recent years and a contraction in the size of the industry.”