These Big Investors Are Bailing on Hedge Funds

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United States one dollar bills seen on a light table at the Bureau of Engraving and Printing in Washington

© Gary Cameron / Reuters

Ciro Scotti

August 16, 2016

Billionaire investor Paul Tudor Jones reportedly laid off about 15 percent of employees, or about 60 people, at his hedge fund business on Tuesday, in another sign of how difficult this market has been for many such funds and their investors.

Jones’s flagship fund has lost 2.5 percent through late July, according to Reuters, compared to a 6.6 percent gain for the S&P 500 so far this year. The average hedge fund has gained 3 percent this year, according to Reuters.

It’s no surprise, then, that the flight from hedge funds, which saw massive outflows in 2015 and net redemptions of $10.7 billion in the second quarter of 2016, is continuing.

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A new poll of big investors by investment consulting firm NEPC found that almost 25 percent of endowments and foundations surveyed had zero exposure to hedge funds in the second quarter of 2016 vs. 2 percent with no exposure in 2014.

That follows a report by Barclays earlier this month that said lackluster performance, especially by the largest hedge funds, has money managers heading for the exits. Citing “performance challenges of 2015 and early 2016,” Barclays predicted that hedge fund liquidations would rise to 12 percent this year.

In the Barclays poll of 340 global investors with about $8 trillion in assets, 74 percent cited growth in the size of hedge funds rather than an increase in the number of funds as the chief reason for weak returns. As firms get larger, they become less able to react quickly and seize opportunities, the Barclays report suggested.

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NEPC said that while the results of its poll do not mean “there is a mass exodus from hedge funds…they do point to greater pressure on the industry as a whole.”

Besides the low returns pointed to by 80 percent of respondents, high fees were a factor cited by 54 percent in explaining the disenchantment with hedge funds. NEPC said that a quarter of respondents had requested or been offered reduced fees.  

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