Hedge funds face testing outlook

Hedge fund performance has plateaued since 2011 and 2016 could see net outflows from hedge funds, for the first time since 2009.

These are among the findings of a study by Barclays Capital. It found that hedge funds have produced significant excess returns since 1993 but returns have levelled off since 2011, which it said may be due to reduced risk appetite. It also noted underperformance of larger funds compared to smaller funds since mid- 2015. The study included the views of 340 hedge fund investors and, when asked about underperformance, 74% said that the industry was now too big relative to opportunities, while 57% said macro conditions were against hedge funds. Barclays said that these views are backed up by data.

Looking at investor intentions, the research found that investors are increasingly interested in “small and mighty” hedge funds, or relatively small manager, often product specialists, who have very good performance. Barclays also predicted net outflows in 2016 with investors shifting assets into areas such as real estate, private equity and also cash. However, it added that many investors will use hedge funds because of their low correlation to other assets, despite disappointing returns.

In terms of preferred hedge fund strategies in 2016, the research found that systematic and quant strategies are now in favour with investors, while equity long-short and event-driven strategies are less attractive and more likely to see redemptions.