It’s mid-August and we have reliable data on hedge fund performance through July 2017. According to reports, hedge funds, in the aggregate, have achieved July gains of 0.88 percent and year-to-date gains of 4.27 percent, marking nine straight months of positive performance.
Flows
Net flows are also positive, with hedge funds raking in about $109 billion through the seven months on record, almost $72 billion of which represents organic investor inflows, with the remaining $37 billion coming in the form of gains.
Separating the Wheat from the Chaff
Hedge fund closures continue to outpace hedge fund launches. This is fantastic news! Here’s why. Seventy-three percent of hedge funds are in positive territory and, of those; fifteen percent are up by double digits. One can argue that with the remaining 27 percent of hedge funds providing their investors a negative return, market forces should step in and end the misery, for the benefit of both unfortunate investors and, more importantly, the hedge fund industry.
Imagine for a moment what average hedge fund gains might look like absent these poor performers.
More Good News
In classic ‘group think’ fashion, a plethora of foundations and endowments had cut their exposure to hedge funds. However, according to a recent survey conducted by Boston investment consulting firm, NEPC, LLC, roughly two-thirds of respondents indicated their intention to maintain current exposure levels and less than one-third of those surveyed reported any plans to make further cuts in the level of hedge fund exposure. However, the same survey suggests that few respondents expressed an interest in markedly increasing their exposure in the near term.
This strongly suggests that sentiments toward the hedge fund industry have stabilized, but work remains to be done in terms of regaining their full confidence.
Points of Concern
Respondents to the NEPC survey expressed the same litany of concerns that investors of all stripes have espoused over the past few years. The number one concern is performance, with 76 percent of respondents acknowledging low or disappointing returns as the main reason for their pullback. However, this is a 4-percentage point improvement over last year’s survey, in which 80 percent cited poor performance as their principal concern.
High fees took the number two spot, and, surprisingly, 73 percent of those surveyed this year cited high fees as a concern as compared to 54 percent last year. This is surprising because fees have been trending lower.
The third most often cited concern is transparency. In last year’s survey, transparency was named as a concern by 37 percent of respondents. In 2017, 65 percent of survey participants named transparency as a cause for concern, an alarming increase.
Final Thoughts
If the hedge fund industry desires increased investment from foundations and endowments, they must strive to meet the top concerns of these investors. Simply stated, this means improved performance, continued fee reductions, and heightened levels of transparency.
In order for hedge funds to make inroads with this segment of the investment community, the industry must strive to be more responsive to these concerns. If the industry fails to address these issues, further erosion may occur.
