The surprise announcement of Paul Tudor Jones laying off 60 people representing 15% of his employees this week means that you need to be especially aware of hedge fund trends that are changing the industry. This does not mean that all of the hedge funds are losing money like his flagship fund loss of 2.5% through late July. In fact the hedge fund average performance for the year per Reuters is now 3%. This is still less impressive than the 6.6% gain the S&P 500 has managed for the year. Keeping this in mind, there are several changes going on in the industry that you should watch closely.
Endowments and Foundations Are Leaving Hedge Funds
The recent Barclays report on hedge fund trends and performance stated that investors are not leaving the industry wholesale. Some segments are retreating from it though. Investment consulting company NEPC surveyed big investors to learn that nearly a quarter of foundations and endowments had no hedge fund exposure in 2016 in the second quarter. For 2014, only 2% of these institutional investors made the same claim. These are major investment dollars that make a big difference for the hedge fund net inflows.
Larger Hedge Funds Tending to Have Poorer Performance
Bigger does not necessarily mean better in the hedge fund world. In fact quite the opposite has been true over the last quarters. The same Barclays report claimed that less than impressive performance from the biggest hedge funds has caused many money managers to redeem at least a portion of their funds. Because of the challenges in performance for all of 2015 and the early part of 2016, Barclays has forecast that such liquidations from (especially bigger) hedge funds will increase to 12% in 2016.
The Barclays research polled 340 individual global investors who managed assets of approximately $8 trillion. An astonishing 74% of them mentioned the increase in the hedge funds’ size as the main reason that industry returns have been weaker than they should be. This response beat out the choice for a multiplying of funds as the main problem in the hedge fund universe today. Barclays suggested that the bigger the hedge fund firms become, the harder it is for them to effectively seize these opportunities and to react with timely speed.
Computer Driven Hedge Funds Outperforming
A rising trend in hedge funds is the resurgence of the computer driven models. For the first half of the year, these automated funds saw inflows of $7.2 billion as compared to $25.1 billion that went to hedge funds in general. The reason for this has to do with the better returns the quantitative funds have managed to notch. For June they posted gains of 3.3% while for the first two quarters of 2016 they returned 4.33%, per Eurekahedge the hedge fund industry tracker.
Besides being the biggest winners as a whole for the year, the computer driven funds saw the best returns on the night and immediate aftermath of the Brexit referendum vote. Some of them made enormous gains. They have done better than their peers because of the strategies the computer run funds picked in a challenging global investment climate. They moved money into the traditionally safe haven assets such as gold and the Japanese yen versus higher risk currencies such as the Mexican peso over the first six months of the year. This strategy returned them over 7% on June 24th alone.
European Hedge Fund Closures Are Outpacing Openings
If you have been considering investing in European hedge funds, you might rethink the strategy. For six consecutive quarters now, the European hedge fund industry has experienced more shutdowns than new launches. In a year and a half, 484 of these European based funds have liquidated. A good recent example of this trend comes from London headquartered Mako Global investors. Only nineteen months ago it launched its own European equities styled hedge fund. Now thanks to evaporating interest from investors as well as poor returns, the firm is shuttering it. This Mako Global Investors’ CT Invest Fund reached a high of $100 million in assets under management back in April of 2015. It is now another disappointing statistic among the 200 different hedge funds that have shut down in only the first half of this year, per information from Preqin the industry tracker.
High Fees Can Be Negotiable
Another interesting trend from which you can benefit with your hedge fund investments concerns the high fees. A solid 54% of the NEPC survey respondents claimed that the high costs of participating in the funds proved to be a major reason for their unhappiness with the industry as a whole. Another 25% of respondents claimed that the funds had offered them a reduction in fees or that they had requested one. This is an important point to take away from the developments in the hedge fund world lately. Significant numbers of the funds are offering special discounts in the fees they charge if you keep money under management with them or add new money.