Hedge funds under siege
Outflows likely to continue
The fundraising challenges of 2016, however, show little sign of abating in 2017. Outflows accelerated throughout 2016, with the largest levels of investor redemptions made in the final quarter of the year (see “Race to the exits, above”). In our December 2015 investor review, Preqin noted for the first time that more investors planned to reduce rather than increase their exposure to hedge funds in the next 12 months (32% versus 25%). See “Bad omen,” page 18. Our December 2016 interviews indicate that we may see continued outflows over 2017. Nearly twice the proportion of investors (38%) plan to reduce their exposure in 2017 than intend to increase (20%); a concern for managers as both retaining capital and fundraising is likely to continue to be a challenge in 2017.
However, despite being squeezed on fees, fund managers are seeking to invest more in their marketing, business development and investor relations capabilities in order to combat these difficulties, which they face in retaining capital and gaining fresh inflows.
As markets respond to the unexpected events of 2016, the ramifications of which are far from clear, 2017 could be a time for hedge funds to show their worth to investors if they can continue to build on the solid returns of 2016. Undeniably, many investors have grown cautious when it comes to investing in hedge funds, with a growing proportion looking to cut back on their investments in the near future. However, despite short-term concerns around performance, hedge funds have proven their worth in institutional investors’ portfolios on a risk-adjusted basis over the long term.
However, with 14,500 funds open to investment, it is more challenging than ever to find the right fund in terms of strategy, performance and fees. Therefore, intelligence that can help investors cut through the noise and find the funds that meet their needs may be the first step for institutions in creating portfolios of funds that can help them meet their long-term objectives.
The industry is in a period of change. Investor pressure on performance and fees has grown and there have been large-scale redemptions from hedge funds. In addition, the gap between new fund launches and fund liquidations has narrowed to just 25 as redemptions have grown from 2011 through 2015. If outflows continue in 2017, we may continue to see a shake-out of those funds that have failed to meet investors’ return expectations in recent years and a contraction in the size of the industry.
Data and intelligence can help fund managers navigate these challenging times, not only in finding those investors looking to allocate fresh capital to hedge funds, but also in understanding the plans and needs of the institutions that currently invest in their funds. In a competitive marketplace, having intelligence on your peers – how are they performing, what fees they charge and who is invested in those funds – may also help managers set themselves apart in 2017.Amy Bensted is responsible for all of Preqin’s hedge fund products and solutions. The hedge fund team conducts research into all areas of the asset class. Bensted is a regular contributor in the financial press. She holds undergraduate and graduate degrees from Imperial College London.