“Simply put, quants nailed the inflation trade,” said Andrew Beer, founder of New York-based Dynamic Beta Investments, which attempts to replicate hedge fund-type returns at a low cost. “While humans hummed and hawed about whether inflation was transitory or had peaked, quants piled in early and just rode it.”
The common link between the best performers was their size. While smaller funds enjoy a theoretical edge that helps them move in and out of positions more easily, investors have been largely migrating toward bigger players for steadier gains and reduced business risk.
The fortunes of bigger funds is vitally important for investors: Just a fifth of hedge funds manage 90% of the industry assets, according to data compiled by Hedge Fund Research Inc.
The Bad
The net $75 billion of outflows from the industry occurred in the year through October and that number may swell as 2022 draws to a close and investors rebalance their portfolios.
Equity-focused hedge funds suffered the biggest exodus as investors lost patience with yet another year of poor performance. Such money pools were down an average of about 12% through November, according to data compiled by Bloomberg, close to the 14% decline in the S&P 500 Index during the period.
By geography, investment firms based in Europe suffered most of the outflows, while those based in the US, the biggest market for hedge funds, were largely shielded. A Preqin analysis revealed that better returns at North America-focused and based funds are driving investors into them in contrast with relatively poor returns at Europe-based managers.
“North America still holds the crown when it comes to median allocations to hedge funds,” Preqin said in its report.
The Ugly
Overall, the industry’s growth has almost stagnated. This year is on track to see the least number of hedge fund startups globally since Preqin started compiling the data in 2000.
While it may be an indication of a maturing industry, the trend also signals a notoriously difficult capital raising environment for hedge funds as investors place their cash with the bigger, more established firms. Traders who could have started their own firms, and even those already running their small funds, are giving up and joining bigger rivals.
The crowded equity-focused hedge funds market, where more than 4,000 managers operate, was the hardest hit: roughly 42% of the hedge fund liquidating through September this year wagered on stocks.
And the reasons are obvious. Stock pickers had a tough year and they failed to capture most of the upside during the recently ended bull market but have suffered the most during the ongoing sell off. More than six in every 10 equity hedge funds lost 10% or more through September, their worst showing compared with their own recent past as well as against their peers’ performance, according to data compiled by Preqin.
2023 is “kind of a make or break year,” Caron Bastianpillai, who allocates money to hedge funds at Switzerland-based Notz Stucki & Cie, said. “If you have two years in a row where hedge funds underperform, I think people are just going to give up.”
--With assistance from Nicholas Holtzman and Yaqi Huang.
This article was provided by Bloomberg News.