Key Takeaways
- • Net outflow persists despite positive performance: Investors deposited $1.69 billion into hedge funds in February 2019, yet the sector experienced net outflows year-to-date, signaling continued redemption pressure despite the Hedge Fund Research HFRI Fund Weighted Composite Index rising 4.9% in the first two months—the strongest start since 2012.
- • Macro and managed futures strategies hemorrhaging capital: Two-thirds of reporting managers faced redemption pressures in 2019, with investors actively fleeing macro and managed futures strategies following poor 2018 performance, while long/short equity strategies also experienced redemptions, albeit at a reduced rate compared to January.
- • Investor flight to performance and scale: The largest ten managers captured inflows with average returns exceeding 3%, with all but one product generating positive 2018 returns. Conversely, the primary sources of outflows came from managers posting negative 2018 results, indicating capital concentration among top performers.
- • Multi-strategy funds emerging as preferred vehicle: Multi-strategy funds demonstrated strong performance momentum into 2019 and are attracting investor preference, representing a tactical shift in asset allocation within the hedge fund sector.
- • Industry fee pressure persists: The traditional "two-and-20" compensation model (2% annual management fee, 20% performance fee) continues facing headwinds, pressuring manager economics as investors demand improved returns to justify fee structures.
Summary
The hedge fund industry faces a paradoxical backdrop in March 2019: while performance benchmarks signal recovery, underlying capital flows reveal persistent redemption pressures. According to eVestment data, investors contributed $1.69 billion to hedge funds during February, yet the sector remained in net outflow territory for the year-to-date period. This contradiction underscores a bifurcated market where select strategies and managers attract fresh capital while the broader industry grapples with sustained investor exits.
The 2018 performance deterioration continues to drive capital allocation decisions. Two-thirds of reporting managers reported facing redemption pressures in 2019, with macro and managed futures strategies experiencing particularly acute outflows following low returns in 2018. Long/short equity funds, historically a hedge fund staple, also saw redemptions in early 2019, though at a moderated pace relative to January withdrawals. This selective redemption pattern reflects investor reassessment of strategy efficacy and risk-adjusted returns.
Performance recovery, however, is beginning to shift investor sentiment. The Hedge Fund Research HFRI Fund Weighted Composite Index delivered a 4.9% gain through the first two months of 2019, marking the strongest calendar-year start since 2012. This upturn has provided some practitioners with evidence that the sector retains value, though it has not yet arrested broad redemptions. Multi-strategy funds have emerged as the preferred vehicle, combining strong January performance with continued positive momentum into February.
Capital concentration among top-tier managers is accelerating. The ten largest managers generated average returns exceeding 3%, with all but one product positive in 2018—a critical differentiation point. eVestment identified a "clear preference" for large managers, with the largest sources of outflows derived from underperforming managers in 2018. This dynamic suggests investor capital is gravitating toward proven performers while exiting underperforming vehicles at an accelerating pace.
The traditional industry fee model faces continued pressure. The "two-and-20" structure—2% annual management fee plus 20% performance fee—has come under investor scrutiny as returns have disappointed relative to expectations. Recent performance improvements may provide some relief, but the structural fee pressure on the industry persists.
The 2018 performance deterioration continues to drive capital allocation decisions. Two-thirds of reporting managers reported facing redemption pressures in 2019, with macro and managed futures strategies experiencing particularly acute outflows following low returns in 2018. Long/short equity funds, historically a hedge fund staple, also saw redemptions in early 2019, though at a moderated pace relative to January withdrawals. This selective redemption pattern reflects investor reassessment of strategy efficacy and risk-adjusted returns.
Performance recovery, however, is beginning to shift investor sentiment. The Hedge Fund Research HFRI Fund Weighted Composite Index delivered a 4.9% gain through the first two months of 2019, marking the strongest calendar-year start since 2012. This upturn has provided some practitioners with evidence that the sector retains value, though it has not yet arrested broad redemptions. Multi-strategy funds have emerged as the preferred vehicle, combining strong January performance with continued positive momentum into February.
Capital concentration among top-tier managers is accelerating. The ten largest managers generated average returns exceeding 3%, with all but one product positive in 2018—a critical differentiation point. eVestment identified a "clear preference" for large managers, with the largest sources of outflows derived from underperforming managers in 2018. This dynamic suggests investor capital is gravitating toward proven performers while exiting underperforming vehicles at an accelerating pace.
The traditional industry fee model faces continued pressure. The "two-and-20" structure—2% annual management fee plus 20% performance fee—has come under investor scrutiny as returns have disappointed relative to expectations. Recent performance improvements may provide some relief, but the structural fee pressure on the industry persists.
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