Next year may be just as difficult as this one has been for hedge funds, at least when it comes to fundraising.
Big investors just keep pulling money from the funds, and it looks as if that will continue into 2017. Metropolitan Life Insurance Co., for example, noted in an investor call Friday that it planned to reduce its hedge fund allocation to just $800 million by the end of next year, from about $1.8 billion earlier this year. Many others, including public pension funds in New York and California and American International Group, have been making similar moves.
Meanwhile, British energy company Centrica Plc said it wasn’t interested in investing its pension assets in hedge funds, regardless of their performance.
“My definition of hedge funds is where people seek to magic up returns out of nothing,” Chetan Ghosh, chief investment officer of the company’s 7.3 billion-pound retirement funds, said in a Bloomberg News article on Friday. “We don’t have any reliance on that” and have no plans to change, he said.
Investors have been moving away from hedge funds after their collectively unimpressive performance. They pulled $51.4 billion in the first three months of the year, putting 2016 on pace for the first year of net withdrawals since 2009, according to HFR data.
Meanwhile, the number of hedge funds in existence has steadily declined and is now the lowest in three years, the data show.
This comes just as a growing number of analysts say active managers have a better chance of outperforming broad indexed strategies. This may be true. As bond yields rise and volatility increases, funds will likely have more chances to prove their superiority to passive funds.
But unfortunately for these funds, as of now, they’re still struggling to collectively demonstrate their advantage.
For example, this year, as the S&P 500 index surged 9.8 percent through Nov. 30, equity hedge funds delivered only a 4.9 percent gain, HFR data show. A broad index of U.S. corporate bonds gained 7 percent, compared with 6.5 percent for relative-value hedge fund strategies, during the period. And while these funds are lowering their fees, they still cost much more than exchange-traded or mutual funds.
In the meantime, big insurers and pensions will continue reducing their allocations to the funds.
"It will continue to be challenging for hedge funds," MetLife's chief investment officer, Steve Goulart, said earlier this year.
Until they can prove they're worth the expense, that certainly seems to be the case.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
To contact the author of this story:
Lisa Abramowicz in New York at firstname.lastname@example.org
To contact the editor responsible for this story:
Daniel Niemi at email@example.com