Investors Signal Caution After Hedge Funds Stumble

Investors are wary of making new hedge fund allocations after managers stumbled into their first quarterly loss of the year.

The industry declined 0.21 percent during the three months through September, dragged down by losses in August, according to a Preqin report Thursday. The number of hedge funds created in the third quarter dropped about 45 percent from the previous three months, “perhaps as managers put plans on ice in a difficult macroeconomic climate,” the alternatives data provider said in the report.  

The majority of investors seems to be taking a “cautious approach” to the asset class, with 73 percent expecting to allocate less than $50 million in fresh capital to hedge funds over the next year, according to Preqin. Sixty-one percent of investors said they wanted more diverse portfolios regionally, and were seeking global mandates to mitigate geopolitical risks and heightened market volatility.

“As recessionary fears grow, the hedge fund sector is facing challenges – and opportunities – on multiple fronts,” Preqin said. “Long/short equity remains the most sought-after core strategy.” 

Fifty-one percent of hedge fund mandates are targeting long-short equity over the next 12 months, the data tracker said. Macro is the next most popular strategy in fund searches, followed by multi-strategy hedge funds.

Macro was the best-performing core hedge fund strategy in the year through September, with a 5.61 percent return, according to Preqin. That’s more than double the 2.14 percent gain produced by hedge funds across all strategies over the same period, according to the firm’s benchmark index.  

“The proportion of macro strategies funds also rose significantly between quarters,” Preqin said of the number of funds launched during the third quarter. “Perhaps investors are increasingly looking for downside protection.” 

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Hedge funds focused on credit strategies had the second biggest returns in the year through September at 3.96 percent, followed by multi-strategy at 2.95 percent, the report shows. The same categories were top performers in the third quarter with gains of about 1 percent each.

Event-driven hedge funds, meanwhile, saw the worst performance in the third-quarter, tumbling 1.36 percent to increase their losses to 1.5 percent for the year through September. 

Investors have faced “an increasingly turbulent political backdrop,” while central banking moves haven’t quelled fears of an economic contraction, according to Preqin. 

Two rate cuts by the Federal Reserve during the third quarter failed to “ignite investors,” the firm said. “When the U.S. yield curve inverted in August, fears of an impending recession intensified.”