Finance

Duncan Mavin is a former Bloomberg Gadfly columnist.

Among the gloomy hedge fund news in recent weeks was BlueCrest Capital Management's decision to return $8 billion of outside money to clients.

Founder Michael Platt said the hedge fund would become a private investment vehicle, citing falling fees and rising costs.

More recently, Martin Taylor of Nevsky Capital closed his 20-year old fund on the grounds that today's markets just can't be traded because of the unpredictable influence of central banks in Asia. 

But now, it turns out at least a some of BlueCrest's client money -- the $1.2 billion AllBlue Fund -- won't be leaving the industry. It's been transferred to JPMorgan Asset Management's Highbridge Multi-Strategy hedge fund.

It's a big win for the bank and a small reminder that reports of the demise of hedge funds may be wide of the mark.

Certainly, 2015 was no banner year. Some big name hedge funds tripped up on big trades: think Valeant or European Central Bank policy. Other companies, like Fortress and Blackrock, gave up on their hedge funds altogether. Performance was ho-hum, with the sector as a whole ending the year down 0.85 percent, according to data provider HFR. Pressure is building on the traditional, rich, fee model of 2 and 20, where hedge funds charge 2 percent in management fees and keep a fifth of their profits.

Annual Performance
Hedge fund returns are shrinking, according to HFR
Source: HFR

Investors are apparently thinking of reducing their hedge fund allocations too. According to data from research firm Preqin, 32 percent of institutional investors say they may reduce their exposure to hedge funds in 2016, twice the number that said they were planning to cut at the start of last year.

But some perspective is needed. For starters, the Preqin number, first reported by the Financial Times this week, references the number of investors, not the volume of their assets. How many dollars these investors actually oversee isn't known.

Allocation Intentions
Investors' plans for the next 12 months
Source: Preqin

And think of it the other way round: 69 percent of the investors surveyed said they're planning to put more into hedge funds or keep their existing allocations.

The industry has already grown to enormous size. Assets have been rising more or less steadily for years and stood at $2.9 trillion at the end of September, HFR says. That was down from the previous quarter's record high, but it's still twice the size of the industry in 2008.

Hedge Fund Growth
The industry is twice the size it was in 2008
Source: Hedge Fund Research

Annual performance data too is nuanced. It's dangerous to generalize across the range of hedge funds. Still, HFR says that although the group as a whole ended the year down, 55 per cent of hedge funds posted gains in 2015.

The rapid growth in hedge fund assets means a pause in inflows wouldn't be a surprise. As always, investors will scrutinize their hedge fund picks to weed out poor performers, all the more so after a couple of relatively lean years for the industry.

And it all adds up to more pressure on the industry to reduce fees -- especially those firms that aren't producing stellar returns.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Duncan Mavin in London at dmavin@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net