Investors may pull as much as $100 billion from the hedge fund industry this year, as a result of the economic fallout from the coronavirus crisis.

The outflows -- which may range from $50 billion to $100 billion -- would mark the largest drawdown since the global financial crisis, when the industry saw $154 billion in withdrawals in 2008, according to a Barclays Capital Solutions report.

“We’re already $30 billion in -- in terms of redemptions,” Kate Holleran, managing director of capital solutions at Barclays, said in a telephone interview. “We were optimistic coming into this year, given the strength of 2019, that we might actually see inflows. That is clearly not going to be the case.”

The year fell into chaos as Covid-19 became a global pandemic, seizing up credit markets and putting an end to Wall Street’s longest-ever bull market. The damage pushed the Federal Reserve to intervene, flooding the markets with trillions of dollars in stimulus. That effort, combined with the easing of lockdown restrictions across the U.S. and rising hopes of a quick economic recovery, helped the S&P 500 index soar from its March low.

With markets defying the initial gloomy expectations, Holleran believes redemptions will likely come in at the lower end of the range.

“The redemptions we’ve seen are so far are liquidity-driven, meaning due to portfolio rebalancing and meeting contractual obligations for funding illiquid alternative investments, versus a frustration with the asset class or its performance,” she said.

Providing Value
Some of the industry’s biggest names, including Ray Dalio’s Bridgewater Associates, took a beating in March, when stocks plunged. Despite the rough month, hedge funds have kept pace with the S&P 500 Total Return Index for the year, down about 5% through May, according to Hedge Fund Research.

“Hedge funds do not cope well during sudden ‘shock’ months of bear markets, but they capture much less of the downside for the remainder of the crisis,” according to the report.

“Hedge funds really did, for the most part, provide value in the first quarter and continue to through today,” Holleran said. The roughly 200 funds that the Barclays team tracks were on average flat this year through May, she said.

Still, investors were less keen to allocate money to hedge funds at the end of March than they were at the end of last year, with 21% intending to increase investments compared with 41% in December. The share of those seeking to redeem increased slightly in that time to 18% from 16%.

Among the other findings:

• About 62% of investors who do plan to put money to work are prioritizing managers they’ve already invested in, while 40% would consider a previously closed high-quality manager they haven’t invested in.

• The most favored strategies for the year are distressed credit, sector-specific equity and discretionary macro. Generalist stock-pickers, quantitative equity and market-neutral equity are the least favored.

• The current crisis will likely accelerate the consolidation of assets in the hands of fewer, larger managers.

• Allocators appear less interested in illiquid investments such as private equity, private credit and real estate.

Barclays surveyed 179 hedge fund investors in March and April, representing $480 billion in assets globally.

This article was provided by Bloomberg News.