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Hedge fund investor redemptions accelerate through Q4 2016

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Despite hedge funds returning 7.40 per cent over 2016, investors continued to withdraw capital over the year, with the industry seeing overall net asset outflows totalling USD110 billion in 2016. 

Preqin’s latest research finds that the rate of redemptions accelerated through the year, from net outflows of USD14 billion in Q1 to USD43 billion in Q4 2016. Every leading hedge fund strategy recorded net outflows for the year: by contrast, CTAs recorded annual net inflows of USD26 billion despite lacklustre performance. Although there have been widespread redemptions across the industry, there is a clear link between past performance and recent asset flows, with the best performing funds in 2015 and H1 2016 being the most likely to see net inflows in Q4 2016. 

The hedge fund industry has now seen five successive quarters of net outflows; net redemptions since Q4 2015 have totalled USD119 billion. 

Funds pursuing an equities strategy were the only sector to see net outflows in every quarter of 2016. Equities strategies (USD50 billion), credit strategies (USD28 billion), relative value strategies (USD25 billion) and multi-strategy (USD23 billion) funds account for the majority of 2016 outflows. 

The largest proportion of funds of every leading strategy saw net outflows. Of these, the majority of equities strategies (53 per cent), macro strategies (56 per cent) and niche strategies (60 per cent) funds recorded net redemptions. 

The majority (58 per cent) of funds with USD1 billion or more in assets saw net outflows in Q4 2016, while only 26 per cent saw inflows. Among the smallest funds with less than USD100 million in assets, 49 per cent recorded net Q4 outflows, and 35 per cent saw inflows. 

Funds that recorded higher returns in 2015 were more likely to see net inflows in Q4 2016. Forty-four percent of funds that gained 5.00 per cent or more the previous year saw net inflows, twice the proportion of funds that saw 2015 losses of more than 5.00 per cent. 

Similarly, funds with higher performance in H1 2016 were more likely to see net Q4 inflows. However, even among funds that returned +5.00 per cent or more, a greater proportion saw net outflows (46 per cent) than saw inflows (40 per cent) through the quarter. 

Amy Bensted, Head of Hedge Fund Products, says: “Investors continued to withdraw capital from the hedge fund industry over 2016, as concerns around performance and fees grew, despite the Preqin All-Strategies Hedge Fund benchmark recording its highest gain in three years. In total, hedge funds recorded outflows of USD110 billion in 2016; however, CTAs recorded net inflows of USD25 billion, as investors rebalanced in favour of these strategies at the start of the year. 

“With performance at the forefront of investors’ minds in 2016, Preqin’s data shows that those funds that posted superior performance in 2015 and the first half of 2016 saw greater inflows than funds which made smaller gains. Therefore, as we move forwards in 2017, it is likely that investors will continue to scrutinize the returns of funds, and are likely to continue to withdraw money from funds that have failed to meet their own individual or benchmark returns.” 

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