This content is from: Portfolio

Are Investors Growing Weary of Hedge Funds?

Hedge fund launches are declining, while redemptions exceeded investment in July for the fourth month in five.

Investors appear to be fed up with hedge funds, at least for the time being.

For example, HFR Thursday reported that the number of launches of new hedge funds is on the decline. It counted 245 launches in the second quarter, down from 304 in the prior quarter. The June period marks the lowest quarterly launch total since the fourth quarter of 2010.

This news comes on the heels of our recent report that hedge fund investors redeemed an estimated $11.8 billion in July alone, making it the fourth month in a period of five that investors yanked out more money from hedge funds than they invested in them.

So what’s going on? Certainly recent weak performance among hedge funds amid an otherwise surging market has something to do with it.

The average hedge fund lost more than 5 percent last year and is down 2.8 percent in the second quarter, according to HFR.

Meanwhile, investors in general have less of an appetite for risky investments.

HFR also attributes the decline in hedge fund launches to managers preparing for increased reporting requirements and a growing number of investors demanding that funds create institutional-like infrastructure.

HFR notes in a report that the capital-raising environment is especially tough for small- to mid-size funds.

But the recent trends of mostly monthly net redemptions and fewer new launches could change soon, for a few reasons.

For one thing, the market's overall surge this year, especially in the third quarter, could ease concerns and increase the risk tolerance among investors who like to chase performance.

The Federal Reserve’s Thursday announcement that it is instituting QE3 also helps, underscored by the stock market’s strong move upward in response.

And the JOBS Act, which will soon ease restrictions on hedge fund advertising, could also lead to more new launches and overall increases in net hedge fund flows.

Related Content