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The Morning Brief: Investors Growing More Impatient with Hedge Funds, Survey Finds

Hedge fund investors are getting more impatient with consistently underwhelming hedge fund performance. According to a new survey from London-based industry tracker Preqin, 80 percent of investors interviewed in June expressed disappointment with hedge funds for failing to meet their return expectations over the past 12 months. Until now, the highest level of dissatisfaction with returns came in December 2012, when Preqin found that 41 percent of investors stated their return goals had not been met in the previous 12 months. As of June 2016, the Preqin All-Strategies Hedge Fund benchmark was off 1.14 percent over the trailing 12 months.

So, what do investors plan to do about this? Well, it seems from the Preqin report they are going to push hard on lowering fees. According to the survey, 58 percent of hedge fund investors believe fund manager and investor interests are misaligned. At the same time, 73 percent of investors reported they are looking to improve management fees over the next 12 months.

“Retaining investor capital as well as fundraising could become increasingly challenging over the rest of 2016 and into 2017,” Preqin asserts in its report. It points out that according to its June survey, about 39 percent of investors plan to reduce the amount of capital they have invested in hedge funds over the next 12 months. At the same time, just 18 percent plan to increase their exposure.

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Hedge funds are bearish on energy stocks. According to a report published by Credit Suisse’s Prime Services unit, equity long-short funds are net short energy stocks for the first time since at least 2007. The report also points out that multistrategy funds also increased their energy shorts from late July through September 6. Credit Suisse notes that short selling in exploration and production and other oil, gas and consumable fuels stocks is especially unusual given there was net short covering of cyclicals by hedge funds throughout the world over the past three weeks.

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In general, Credit Suisse’s Master Index of hedge fund performance gained 0.3 percent in August, trimming its loss for the year to 0.3 percent. Emerging markets were the biggest winner last month, gaining 1.4 percent, thus bringing gains for the year to 3.7 percent. The biggest losers were CTAs and futures funds, down 3.3 percent last month. They now have a small gain of 0.2 percent for the year.

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Separately, Chicago-based data tracker HFR reports that its Weighted Composite Index of hedge fund performance returned 0.4 percent in August, bringing its gain for the year to 3.5 percent. The index, which weighs each fund’s performance equally no matter their assets under management, has now been in the black for six straight months after losing money in January and February. The HFRI Asset Weighted Composite Index rose 0.4 percent in August and just 0.5 percent for the year. Event-driven strategies were the best performers in August, gaining 1.8 percent, driven by activist and distressed strategies. The HFRI Event-Driven Index is now up 6 percent for the year. The HFRI Macro (Total) Index fell 1.6 percent in August, led by declines in quantitative, trend-following CTA strategies. The index is now up 2 percent for the year.

“Specialized strategies across Event Driven and Equity Hedge, including Energy-focused, Distressed and Shareholder Activist posted strong gains to lead hedge fund performance in August as Oil surged while global equities, interest rates and high yield credit were essentially unchanged for the month,” says Kenneth Heinz, president of HFR, in a press release. “In an environment dominated by demands for ultra-liquidity, a common performance theme is each of these leading strategies captures a liquidity premium over an intermediate timeframe by leveraging both fundamental and transactional specializations.”

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