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Hedge fund firms start 2016 with whimper, end with bang

By a reading of the 2016 stats, the hedge fund industry's latest evolutionary stage commenced somewhat benignly.

Despite difficult market conditions in the first half of 2016, average hedge fund returns ended the year in the black, showed data from Hedge Fund Research Inc., Chicago.

The HFRI Fund Weighted Composite index returned 5.57% for the year, while the HFRI Asset Weighted Composite index came in at 2.96%. The HFRI Fund Weighted Composite return was well above the index's 2015 return of -1.12% and the 2014 return of 2.98%, but lagged the 9.13% return for 2013.

By the contrast, returns of the Standard & Poor's 500 index — not the best comparison for hedge fund performance according to industry insiders but widely used nonetheless — topped hedge fund indexes with 11.96% in 2016; 1.38% in 2015; 13.69% for 2014; and 32.39% for 2013.

Aggregate hedge fund assets hit a new high at the end of 2016 and the number of active hedge funds was not far off peak levels.

Total hedge fund industry assets grew a slight 0.73% to $3.04 trillion in 2016 — a new industry high — thanks to performance gains of $119.9 billion, estimated research specialist eVestment LLC, Marietta, Ga.

Counterbalancing investment gains in 2016 was $106 billion of net outflows, according to eVestment's January 2017 Hedge Fund Industry Asset Flow Report. The quarter ended Dec. 31 was the fifth consecutive quarter of net outflows. In 2015, net hedge fund inflows totaled $11.1 billion, eVestment data showed.

Despite the outflow in 2016, institutional investors were not the main culprits. In fact, total assets invested in U.S. hedge funds by five categories of global institutions hit or were close to a four-year peak, according to data from alternative investments industry researcher Preqin in London.

Public pension fund investment in U.S. hedge funds, for example, totaled $295 billion in 2016, up $97 billion or 49%, from 2012.

Corporate pension fund investment in U.S. hedge funds was $247 billion at year-end 2016, up 135% from 2012. Endowments invested $207 billion, up 24% and foundations put in $173 billion, up 59%. Sovereign wealth funds invested $20 billion; that was down 5%, or $1 billion, from $20.8 billion in 2012.

Insurance assets invested in U.S. hedge funds as of Dec. 31, 2016, dropped by 14.3% or $6 billion from the end of 2012, while investment by miscellaneous institutional investors dropped 74% to $12 billion in the four years.

Preqin data showed the institutional share as a percentage of all assets invested in U.S. hedge funds remained steady in three of past four years as of Dec. 31. For 2016, it was 39%; 2015, 37%; 2014, 36%; 2013, 48%; and 2012, 37%.Outflows in 2016 seemed to have only a minor impact on the survival of individual hedge funds. HFR researchers estimated the number of active hedge funds to be 8,326 at year-end 2016, down 1.7% or 148 funds from a peak of 8,474 from a year earlier. But the number of hedge funds as of Dec. 31, 2016, was the lowest since 2013, when funds numbered 8,190.

The balance of new hedge fund launches and liquidations globally was fairly even in 2016 at 1,006 and 981, respectively, showed the Preqin analysis.

This article originally appeared in the March 6, 2017 print issue as, "Hedge fund firms start 2016 with whimper, end with bang".