Assets held by hedge funds globally reached a record USD3.22 trillion as of the end of November 2016, according to Preqin’s 2017 Global Hedge Fund Report.
Investor outflows through the year totalled USD102 billion, and at the end of the year, a record 66 per cent of hedge fund investors said their hedge fund portfolios had fallen short of their expectations.
However, 2016 also marked the best performance year for the industry since 2013, posting gains of 7.40 per cent. This offset net investor outflows to drive total industry AUM past USD3.2 trillion, a record high.
Hedge funds recorded their best monthly return for over three years in March (+2.42 per cent); this started a run of positive performance that continued until September. Hedge funds were in the black for nine months in total over 2016 and were able to capitalise on the volatility ensuing from events such as Brexit and the US election.
Despite 2016 proving to be an improved year for hedge fund performance, a net USD102 billion in investor capital has been withdrawn from funds. It is likely that this trend will continue into 2017: almost half (47 per cent) of investors made at least one redemption in 2016, and the proportion of investors that intend to decrease their allocations to many strategies over the next 12 months exceeds the proportion that intend to increase them. 

Preqin says that the year ahead looks likely to be shaped by the same broad factors that dominated 2016. Investor dissatisfaction with the asset class remains high, and the pace of net withdrawals has been accelerating in successive quarters. However, many fund managers feel confident that they will be able to sustain good performance in the months ahead, and both they and investors expect 2017 returns to surpass 2016’s. It remains to be seen if this will serve to convince sceptical investors of the long-term benefits of remaining committed to the asset class.
“Hedge fund managers are likely to remember 2016 as a difficult year for the industry. Investor outflows started at the end of 2015 and continued across the year: in total, net investor redemptions exceeded USD100 billion,” says Amy Bensted (pictured), head of hedge fund products. “Furthermore, some of the largest investors in the world are among those that have withdrawn capital from the industry, with the dual issues of performance and fees leading the concerns they have voiced.
“However, it was not all bad news for the industry; hedge funds added their largest gains since 2011, which boosted assets under management to record levels. In addition, some strategies have largely been spared the wave of redemptions, with CTAs recording inflows of USD17 billion as investors sought diversified and non-correlated products amid rising market volatility.
“Looking ahead, 2017 does not seem likely to prove any less challenging for fund managers; hedge funds will need to continue to perform well in in difficult markets, and address issues over fees in order to win back the growing group of investors sceptical of the value of the asset class.”
