After a year’s worth of new commitments to hedge funds, investors reversed course in the second quarter of 2018, redeeming $3 billion more than they invested, according to data firm HFR.
The outflows followed poor performance in the first three months of the year, with HFR’s fund-weighted composite index edging into the red for the first time since 2016. As of June, the index had gained 0.79 percent since the beginning of the year, trailing the Standard & Poor's 500 stock index, which had gained 2.65 percent.
Before the second quarter, hedge funds had experienced four straight quarters of net inflows, as capital trickled back in following mass redemptions in 2016.
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Despite the return to outflows, hedge fund assets under management rose to a record $3.235 trillion during the second quarter, driven by performance gains in April and May. Event-driven managers led the quarter with a 2.15 percent return and were the only hedge fund category to eke out an overall gain in June.
However, they also suffered outflows over the three-month period, with investors redeeming a net $1.5 billion. Still, the worst flows were reported by macro funds, which had $2.8 billion in net outflows during the second quarter following losses of 1.6 percent in the first three months of the year.
The only hedge fund category to receive positive net flows in the second quarter, according to HFR, was equity hedge funds, which took in $2.4 billion. Equity hedge fund managers gained 0.85 percent during the three-month period, for a year-to-date return of 1.16 percent.
“Performance and capital flows trends shifted and evolved in 2Q ‘18, as managers and investors adjusted to the impact of trade tariff financial market volatility and continued strong U.S. economic growth,” said HFR president Kenneth Heinz in a company statement. He pointed to equity hedge strategies, M&A-centric event driven funds, and specialized technology investors as among the likeliest to benefit from these trends.
“The combination of trade tariff volatility and strong U.S. corporate earnings has contributed to an expanded opportunity for specialized, long-short investing in these areas,” he said.