Finance

Lisa Abramowicz is a Bloomberg Gadfly columnist covering the debt markets. She has written about debt markets for Bloomberg News since 2010.

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.

Selling Out
MetLife plans to accelerate its plan to reduce hedge fund investments in 2017
Source: Public filings
The figure for December 2017 is the forecast by MetLife executives

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.

Looking Down
Hedge funds are poised for their first full year of withdrawals since 2009, in the aftermath of the crisis
Source: HFR
2016 data is for the first three quarters of the year

Meanwhile, the number of hedge funds in existence has steadily declined and is now the lowest in three years, the data show.

Shrinking Pool
The number of hedge funds has declined as more investors opt to withdraw cash
Source: HFR

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 labramowicz@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net