Some institutions had already planned to exit hedge funds before the pandemic and see no reason to return.

Fresno County Employees’ Retirement Association voted to pull its roughly $300 million in hedge funds at the end of last year, focusing instead on equity investments, said Doug Kidd, investment officer at the $4.6 billion pension system.

“In fact, the ‘Fed Put’ appears stronger and more enduring than ever contemplated previously,” he said. “Time will tell whether there are unforeseen consequences, but for now the Fed is telling us there is no need to hedge.”

Adding Funds
Panayiotis Lambropoulos, a portfolio manager of hedge fund investments at the Employees Retirement System of Texas, disagrees, and said he expects volatility and uncertainty to increase as markets adjust to the reality of lower earnings and weaker economic growth.

The pension system has added a couple of hedge funds this year, and Lambropoulos is looking at more strategies including convertible bond arbitrage and volatility-oriented funds. A range of credit funds, from direct lending to those trading stressed and distressed securities, are also being considered.

Jens Foehrenbach, CIO at Man FRM, a division of Man Group that invests in more than 50 hedge funds, said he too is interested in credit funds, and for the first time in a while is bullish on equity hedge funds given the increased dispersion across stocks.

Even with this newfound optimism from some investors, net redemptions could continue this year, especially if stock markets start to tumble and investors need cash. A few institutions have already redeemed to raise money to run their operations or boost charitable giving.

The first hedge funds to get hit were those with weaker track records.

David Gallo told investors last month that he was closing his 13-year-old Valinor Management because several of his largest and oldest investors, predominantly hospitals, endowments and foundations, had put in redemption notices. While performance in the past 18 months had been good, the $1.4 billion firm posted “uninspiring” returns from mid-2015 through 2018, according to a client letter.

Barclays’s Holleran forecasts that after $30 billion in net withdrawals in the first quarter, redemptions for the year could total $50 billion to $100 billion. The lower end of that range is the most likely outcome, she said.

This article was provided by Bloomberg News.

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