Hedge funds are experiencing high levels of redemptions from investors as their current allocation to alternatives stays well above their targets. Private equity is also suffering from the pressure of overallocation.
In North America, the average investor allocation to hedge funds stands at 15.2 percent, more than three percentage points over the average target allocation of 11.9 percent, according to a Preqin report published on Tuesday. Investors in the Asia-Pacific region have allocated 11.2 percent of their assets to hedge funds, slightly higher than the average target allocation of 9.4 percent. Europe is the only region in which the current allocation to hedge funds is trending below target.
“The hit to public equity and fixed-income markets we’ve witnessed during 2022 means [that] many investors have overallocated to alternatives. This is true for many investors in hedge funds, too,” the report said. It added that overallocation to hedge funds is most common in North America, which means that investors in the region may “face more pressure on withdrawals than markets in other regions.”
The pressure is already reflected in recent hedge fund flow data. According to the latest asset flow report from eVestment, investors’ net outflow from hedge funds reached $14 billion in October, the largest for the month since 2016. It was also the fifth consecutive month in which net flows into the asset class were negative. Long-short equity, macro, and credit strategies were the main drivers of net outflows in the past few months, according to data from eVestment.
The ability of hedge funds to protect investor assets in 2022 is part of the reason investors are overallocated to the asset class. According to eVestment data, hedge funds lost an average of 7.6 percent year-to-date ending October, while the S&P 500 lost 17.1 percent. The two most profitable strategies, managed futures and alternative risk premia, gained an average of 12.9 percent and 8.6 percent, respectively, in the first ten months.
Ben Crawford, head of research at BarclayHedge, said that the deteriorating macroeconomic landscape has also contributed to the large withdrawals from hedge funds in recent months. “There were ample reasons for investors to sour on risky assets,” he commented in the latest BarclayHedge Fund Flow Indicator report. “Rising interest rates, unchecked inflation, and increasingly dour economic forecasts, [to] name just a few. Investors trimming risk exposures and performing portfolio rebalancing at quarter-end likely had a multiplying effect on redemption activity from hedge funds.”
Peter Laurelli, head of global research at eVestment, said that the withdrawal from hedge funds is also related to the investors’ rising interests in other asset classes. “Investors have a variety of reasons for reducing or eliminating their hedge fund allocations, but a primary factor over the last several years has been rising allocations to private market and real asset [or] real estate strategies at the expense of hedge funds and public market equity strategies,” he said.
Laurelli added that past performance has a role to play in redemptions, too. The funds with the 50 largest net outflows in 2022 only returned an average of 6.5 percent in 2020, while the funds with the 50 largest inflows in 2022 gained an average of 17 percent two years ago, according to eVestment data.