Over the past several years, the hedge fund industry has struggled to grow, with market uncertainties pushing investors towards safer and more liquid asset classes. In many cases, investors are scared away from hedge funds by media sources that paint all hedge funds with the same brush, labeling them as speculative investment classes.
While hedge funds do offer unique diversification opportunities to certain investor classes, the industry has been unable to get this message through. However, data out this month shows that year over year, requests to exit from hedge funds are declining, signalling a possible turn around for the industry.
The GlobeOp Forward Redemption Indicator, which measures on a monthly basis the number of clients giving notice to withdraw their cash from GlobeOp hedge funds, measured only 3.71 percent in June. This is down significantly from June of 2011, where the indicator measured 4.01 percent.
While the Forward Redemption Indicator is up from May (3.31%) of this year, this is largely due to redemption timing by many institutional clients, which tend to withdraw near the June and December quarter ends. The year over year trend is a better indicator of the improving health of the hedge fund industry. In comparison to the same period in the prior year, the Indicator has shown fewer exit requests in each of the last seven months. This is certainly a positive trend that shows a potential opportunity for growth in the hedge fund industry.
Why the Change?
This declining trend in hedge fund redemptions may be due to a number of factors. Many of the most risk adverse clients left the asset class in 2009 and 2010, leaving more risk tolerant investors remaining. In addition, the high volatility of both equity and fixed income markets may have encouraged other investors to increase their weighting in select hedge funds that offer a lower volatility of returns.
Continuing strength moving forward for the hedge fund industry is a positive development however, and opportunities within the industry may increase as a result. In highly volatile times, such as we’re seeing lately as the European debt crisis unfolds, hedge funds can offer a lower volatility asset class for investors that are willing to tolerate the non-liquid nature of the investments.
If hedge funds can get this message out to the institutional investor community, there may be a substantial opportunity for the funds to grow their assets and operations moving forward.