Investors Redeemed $12 Billion from Laggard Hedge Funds in July

Investors have been a little leery of hedge funds. And who can blame them, given that hedge funds have now lagged the broader indexes for nearly two years.

According to eVestment’s latest data, hedge fund investors redeemed an estimated $11.8 billion in July alone, bringing total industry assets to $2.52 trillion.

In fact, more investors redeemed than invested in hedge funds for four of the previous five months through July.

Year-to-date, there has been a net inflow of slightly less than $10 billion.

Investors are apparently unnerved by the global markets’ volatility from month to month, as well as fears of a euro zone blow-up, uncertainty of the U.S. budget crisis, the U.S. presidential election and concerns about a slowdown in the Chinese economy.

They are also unhappy with the overall performance of hedge funds, which as a group are only up about 4 percent for the year through August; the largest funds are only up 5.7 percent, according to eVestment. This compares with double-digit gains for the S&P 500 and Nasdaq Composite, among other indexes.

Breaking down hedge funds into eight broad strategies, just one experienced a net inflow of assets in July — fixed income/credit ($2.3 billion). It has also been the biggest beneficiary of investor confidence year-to-date, pulling in a net $23 billion.

In July assets mostly flowed out of multiasset funds, long-short equity and general equity strategies.

For the first seven months of the year, multiasset funds experienced a net inflow of assets. As a result, it is the largest category with $954 billion, followed by equity strategies with $775 million.

The funds with the biggest net redemptions so far this year are equity strategies and long-short equity.

Relative value credit tops the list of net inflows with $10.75 billion.

Investors look like they are starting to lose their patience with global macro and managed futures funds. Although the broad group as a whole saw net inflows for the year-to-date, it has experienced net outflows of $2.6 billion over the past three months.

This is not too surprising, given that the group’s performance has been lagging other strategies for a couple of years, and many of them are either in the red or up by low single-digit rates so far this year.

Looking at hedge fund strategies regionally, fund flows are up this year in the Americas and global markets, but down sharply in Europe, emerging markets and, to a lesser extent, Asia.

Of course, if hedge fund performance starts to approach the gains being generated by the widely followed indexes, you can bet investors will once again warm up to the asset class.

Afterall, although many hedge funds blew up or posted double-digit losses in 2008, investors came back in force within two years.