Hedge Fund Investment Outflow... Worst Quarter Since Financial Crisis

Over 40 Trillion Won Withdrawn in Q1

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[Asia Economy Reporter Kwon Jae-hee] Hedge funds recorded their worst performance since the financial crisis in the first quarter. Although they have been criticized for disrupting international financial markets by withdrawing funds after short-term gains, hedge fund investments have also drained away like a receding tide amid heightened economic uncertainty.

According to Hedge Fund Research (HFR) on the 22nd (local time), investor funds withdrawn from hedge funds in the first quarter amounted to $33 billion (approximately 40.7 trillion won). This is the fourth largest quarterly outflow on record and the largest since the second quarter of 2009 ($42 billion).

Kenneth Heinz, CEO of HFR, said, "Due to COVID-19, investors have exceeded their risk tolerance levels," adding, "We are seeing unprecedented volatility and uncertainty, with the largest redemptions from hedge funds since the financial crisis."

Even leading firms in the hedge fund industry have suffered massive losses and could not avoid capital outflows. Renaissance Technologies’ institutional equity fund, founded by Jim Simons, fell 18% during the first quarter. The Alpha Fund declined by 13%. Bridgewater Associates also experienced a 20% decrease in asset value in its flagship Pure Alpha Fund during the first quarter.

The total assets under management in the hedge fund industry fell below $3 trillion for the first time since the third quarter of 2016, recording $2.96 trillion last quarter. This represents a decrease of $366 billion from $3.32 trillion in the previous quarter.

The larger the hedge fund company’s assets under management, the greater the scale of capital outflows. Firms managing over $5 billion saw approximately $20.6 billion in capital withdrawals. Companies managing assets between $1 billion and $5 billion experienced an average outflow of $1.1 billion.

Although the market has shown some recovery this month, investor anxiety remains high due to record unemployment rates and the ongoing impact of COVID-19.

Heinz, CEO of HFR, forecasted, "Although the HFRI Composite Index fell 9.4% in the first quarter, there will be significant opportunities for investors expecting asset prices to rise, those engaging in short betting, and in bonds."

Some analysts argue that hedge funds had been suffering capital outflows for years even before the COVID-19 economic crisis, and the shock of the pandemic accelerated these withdrawals. This is because hedge funds’ returns lag behind the S&P 500 and other benchmarks, while their fee burdens are much higher. Last year, hedge funds’ average returns were 9%, whereas the S&P 500 index returned 32%. Hedge fund fees typically account for 22% of investment capital based on management and performance fees. According to data firm eVestment, $88 billion (approximately 102 trillion won) was withdrawn from hedge funds worldwide last year, double the outflow amount in 2018.