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How large scale redemptions hit hedge funds in Q4 2016
Investors redeemed about US$23.7 billion in hedge funds for December 2016, and a total of US$43.2 billion in Q4 2016, marking a fitting end to an extremely difficult year hit by uncertainty and extreme volatility.
The Asset 19 Jan 2017

Investors redeemed about US$23.7 billion in hedge funds for December 2016, and a total of US$43.2 billion in Q4 2016, marking a fitting end to an extremely difficult year hit by uncertainty and extreme volatility.

December marked the sixth month of outflows in the last seven, and resulted in Q4 not only being the fifth consecutive quarter of redemptions, but also the largest quarterly outflow from the industry since Q1 2009, the height of the financial crisis, according to the year-end report of eVestment.

Hedge fund assets ended 2016 at US$3.042 trillion, an increase of US$13.9 billion. Performance gains of US$119.9 billion offset investor outflows. Redemptions in 2016 were the industry’s largest since 2009, and the third year on record where investors removed more than they allocated.

While the level of outflows in December was on par with prior years (an average of US$18 billion removed over the last five Decembers), it marked the sixth month of outflows for hedge funds in the last seven, and resulted in Q4 not only being the fifth consecutive quarter of redemptions, but also the largest quarterly outflow from the industry since the Q1 2009, and the height of the financial crisis.

Throughout 2016, investors clearly reacted to widespread underperformance from 2015, but at the same time showed a willingness to allocate to products which performed well. Nearly US$180 billion was removed from underperforming products throughout 2016, while over US$70 billion was allocated to those who were able to post gains.

The good news is that investors are returning to emerging market hedge fund strategies in the second half of 2016, despite the presence of losses in China and the Middle East, according to Peter Laurelli, eVestment’s vice president and global head of research.

Laurelli notes that after a 19-month span of negative investor sentiment towards emerging market hedge funds, that lasted through January 2016, investors slowly started to return. Periodic elevated monthly outflows still occurred during the year, as well as negativity towards specific country exposures, but in the last five months, investors allocated an above average amount in all but one month.

“It appears the waves of negativity toward China-focused funds that persisted for most of the year have subsided. Flows were still negative in December for the universe, but only slightly so,” says Laurelli.

The biggest asset gainers of the year were managed futures products. Unfortunately, they also produced the worst average returns of any major strategy, and December/Q4 redemptions reflect investors’ dissatisfaction. In the first nine months, investors added $20 billion into the strategy, but outflows emerged in October, and accelerated through December.

On the opposite side, event driven strategies lost more investor money than any other universe in 2016 and 2015, but produced some of the industry’s best returns this year.

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