Hedge funds assets record first losing quarter in 10 on market volatility, redemptions

Hedge fund industry assets dropped during the fourth quarter to $3.11 trillion as of Dec. 31 from their previous peak, due to investor redemptions, record equity market losses and overall market volatility, data released Friday by Hedge Fund Research showed.

The drop from $3.24 trillion as of Sept. 30 brought to an end the previous nine straight quarters of record-breaking asset levels. Investors redeemed an estimated $22.5 billion during the fourth quarter, bringing calendar-year outflows to $34 billion, about 1% of industry capital, data showed.

Performance losses also contributed to the decline in assets and was responsible for a total reduction of industry capital of $115 billion during the fourth quarter. The HFRI Fund Weighted Composite index fell 5.76% during the quarter ended Dec. 31, while the HFRI Asset Weighted Composite index declined 2.73%.

In the year ended Dec. 31, the total number of hedge funds in operation fell by four funds to 8,331, while the universe of hedge funds of funds declined by 95 funds to 1,324. The fourth quarter alone saw a drop of 58 hedge funds in operation from 8,389 as of Sept. 30 and a drop of 47 hedge funds of funds from 1,371 as of Sept. 30.

"Hedge fund outflows in (the fourth quarter) were driven by several factors, most notably investor reaction to steep losses in traditional asset investments and the sharp spike in equity market volatility leading to redemptions. However, outflows also included several large fund closures from early (fourth quarter)," said Kenneth J. Heinz, Hedge Fund Research, in a news release.

He added that these closures took place before the equity market declines in October and December. These included "instances of family office conversions and orderly, manager-initiated returns of investor capital, with all of these representing a stark contrast from the panic-driven redemption from the 2008 financial crisis."

By strategy, HFR's data showed that macro funds experienced an estimated $6.6 billion in net outflows in the quarter ended Dec. 31, bringing estimated assets down to $581 billion. Event-driven strategies, meanwhile, experienced estimated net inflows of $6.4 billion for the fourth quarter, although weakness in performance caused an asset decline to $819 billion from the prior quarter-end's estimated total of $847.1 billion in assets.

Equity hedge funds, meanwhile, experienced losses in both outflows and performance, showing estimated net outflows of $16.8 billion and loss of capital via weak performance, to bring the total estimated assets down to $871.8 billion as of Dec. 31, down from $955 billion three months earlier. Net outflows for relative-value hedge funds totaled $5.4 billion, which along with performance brought estimated assets down to $835 billion as of Dec. 31 from $853.03 three months earlier. Yet these funds posted an estimated gain of $4.84 billion, to $853.03 billion as of Sept. 30, from June 30.

"Trends in macro, CTA and RVA/credit multistrategies, and stronger relative outperformance of larger funds were all favorable throughout the intense market dislocations of December and 4Q," Mr. Heinz said. "While the overall investor flows and performance trends were negative, it is likely that discriminating institutional investors that experienced or observed areas of strong performance through the most difficult equity and commodity trading environment in a decade will factor these positive dynamics into portfolio allocations for 2019."