Investors abandon high-fee hedge funds

WASHINGTON • Hedge funds have suffered their worst quarter in seven years as investors pulled out US$15 billion (S$20 billion) from the firms over high fees and poor returns, the Financial Times reported yesterday.

Total investment in hedge funds fell to US$2.86 trillion in the first quarter of this year, marking the first time since 2009 that the sector has faced two consecutive quarters of net outflows. Investors are starting to fight back over the high fees being charged across the industry, the report said.

Among those who pulled out were the New York City Employees' Retirement System, whose move comes about 18 months after California's pension scheme also dropped hedge funds from its portfolio.

The public advocate for the New York pension scheme, Ms Letitia James, attacked fund managers who "balk at negotiations for investor-favourable terms", believing they "could do no wrong, even as they are losing money".

"If they were truly fiduciaries and cared about our members, they would never charge large fees for failing to deliver on their promises," Ms James said. "Let them sell their summer homes and jets and return those fees to their investors."

Poor performances by the firms in the first quarter - the result of sharp market moves - rankled investors who are already disgruntled over fee structures charging 2 per cent for management as well as 20 per cent of profits. A broad index of hedge fund performance fell 0.7 per cent in the first quarter, according to HFR data.

The largest first-quarter redemptions in the sector came from macro strategies, which saw investor outflows of US$7.3 billion, and event-driven funds, in which US$8.3 billion was pulled.

However, some pension funds are boosting their exposure to hedge funds, including Finland's state scheme and the Illinois State Universities Retirement System, as are some US insurers.

Many managers caution that a volatile market is the worst time to move away from hedged strategies. "More up-and-down markets with a lot of dispersion should be a really good environment for hedge funds," said Ms Judy Posnikoff of Pacific Alternative Asset Management Company. "If we're not in a bull market, where are you going to go?"

A version of this article appeared in the print edition of The Straits Times on April 22, 2016, with the headline 'Investors abandon high-fee hedge funds'. Subscribe