After years of losing both clients and clout in financial markets, signs are emerging that hedge funds are back in favor in the U.S.

In the past few months, investors such as George Soros’s family office and the Texas pension fund have been plowing cash into hedge funds in an effort to diversify their assets after stock markets rebounded much more sharply from the coronavirus-stoked sell-off than anticipated.

Some well-known fund managers, sensing the moment, began accepting new capital for the first time in years, including D.E. Shaw & Co. and Seth Klarman’s Baupost Group. Twenty-five of these funds, have pulled in about $15 billion this year, according to one prime broker. A Credit Suisse Group AG survey released this week highlighted the shift: Investors are more interested in hedge funds than any other major asset class going into the second half of the year.

The trend is nascent and tepid -- some analysts still project net outflows from hedge funds this year -- and could fade as quickly as it appeared. But it is an encouraging sign for an industry that has been mired in a long and relentless slide since its peak during the 2008 financial crisis.

“The sentiment is that the worst is behind us for now,” said Kate Holleran, managing director of capital solutions at Barclays Plc. “We’re hearing anecdotes of investors revising or paring back their redemption requests and taking a more business-as-usual approach.”

Amid the chaos of Covid-19-induced market volatility, hedge funds have done their job. About 51% made money this year through May, while the S&P 500 index lost almost 6%, according to research firm PivotalPath, whose database represents about two-thirds of hedge fund assets.

Mediocre Returns
That hasn’t been the case for much of the past decade. While some funds made money during the 2008 financial crisis, the subsequent years produced mediocre returns. The Federal Reserve kept interest rates low, crushing the volatility that traders needed to make money. Meanwhile, stocks were in the midst of the longest bull run in history.

Frustrated with underwhelming performance, pension plans and other large institutions pulled about $140 billion from hedge funds from the end of 2015 through last year, according to Hedge Fund Research Inc.

Dawn Fitzpatrick, the $25 billion Soros Fund Management’s chief investment officer, is part of the change. She decided to pump $1.7 billion into hedge funds beginning in March, spying new opportunities in the industry, according to a person familiar with the firm. Last year she pulled $3.5 billion from almost 30 funds citing high fees, poor performance and the desire to manage more money in-house.

Fitzpatrick sent about $1 billion to marquee managers who had been closed, said the person, who asked not to be identified because the decisions aren’t public. She focused on an array of strategies, including middle-market lending in areas where her team doesn’t have expertise, the person said.

A spokesman for Soros Fund Management declined to comment or provide names of managers the firm hired.

Issac Septon, CIO at the The Observatory, a single family office, said he had increased his hedge fund exposure earlier this year by 20%, topping up existing managers and adding new funds to his roster. Most of the cash went to technology, event-driven and mortgage funds and firms specializing in Europe, he said. He redeemed from just one manager who struggled in March.

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