The Morning Brief: Investors Bets on the Wrong Hedge Fund Horses

Investors yanked another $23.7 billion from hedge funds in December, bringing the total amount of redemptions for the year to $106 billion, according to a new report from data tracker eVestment. Even so, the industry finished the year with $3.04 trillion, up $13.9 billion from the previous year, thanks to $119.9 billion in performance gains. The total amount of redemptions for the year was the most since 2009 and the third year ever that the industry suffered more redemptions than the amount of money allocated to hedge funds.

“December was a fitting end to a difficult year for the industry,” eVestment states in its report. “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.” As proof, eVestment points out that of the funds in its database, nearly $180 billion was redeemed from underperforming products through 2016. At the same time, more than $70 billion was allocated to those that posted gains.

However, the biggest takeaway from the report is the fact that investors did what they do best — chased returns. This means they gave money to the strategy they should have avoided and bailed out on the strategy they should have been embracing.

According to eVestment, the biggest asset gainers were managed futures, even though they generated the worst average returns of any major strategy. In fact, the strategy enjoyed $20 billion in inflows for the first nine months of the year but suffered outflows in each of the final three months at an accelerating rate.

“After receiving the second-largest allocations in 2015, and the largest in 2016, managed futures performance will likely be seen as the industry’s biggest disappointment of 2016,” eVestment asserts in its report.

On the other hand, event-driven strategies lost the most amount of money among all of the strategies tracked by the data scorekeeper but produced among the best returns of all hedge fund strategies. Investors also withdrew assets from distressed funds in both 2015 and 2016. Sure enough, distressed was the best-performing primary strategy in 2016.



JANA Partners sold roughly 6.4 million shares of HD Supply Holdings, reducing its stake to 4.9 percent. This means the sometime-activist no longer must make timely filings when it sells additional shares of the distributor of industrial products. In late October, the hedge fund firm disclosed it owned 16.25 million shares, or 8.1 percent of the total. At the time it said the stock was undervalued and is a good investment. It also said it had held discussions with management regarding strategic alternatives and financial and operational ways to boost the stock price.

JANA mostly paid in the low $30s for its shares since it began accumulating the stock in early September, giving it a roughly 33 percent gain on those shares. It also bought about 487,000 shares for more than $36 a share. The stock closed Friday at $41.87.


Shares of Pandora surged 6.33 percent, to close at $12.76, after the music streaming company announced it was laying off 7 percent of its workforce and that it expects to beat fourth quarter revenue and cash flow guidance, citing strong advertising performance.

“During the fourth quarter, we accelerated our core advertising business, increased advertising RPM and saw strong improvements in adjusted EBITDA,” said Tim Westergren, CEO of Pandora, in a statement. Top-five shareholders include Eminence Capital and Corvex Management.


Two Sigma Ventures was one of several investors to participate in a $9.2 million Series A funding round for Kasisto, which is developing Chatbots, or conversational artificial intelligence for companies to engage with customers.