Hedge Funds Suffer Biggest Net Outflow Since 2009

Investor redemptions at hedge funds hit the highest level in December in more than four years according to the SS&C GlobeOp Capital Movement Index which tracks the monthly hedge fund subscriptions and redemptions. For December, the index showed a negative reading of 3.56 percent, the biggest negative reading since September 2009. While high end of year redemption is nothing new, the continued underperformance of actively managed hedge funds versus the index funds may have resulted in bigger outflow last month. In the year ago period, the same index showed a negative reading of 2.61 percent in December.

Another Lackluster Year

Hedge funds underperformed the Standard & Poor’s 500 Index for the fifth straight year in 2013. Hedge fund performance, as tracked by the Bloomberg Hedge Funds Aggregate Index which tracks roughly 2,300 funds, came in with a gain of 7.4 percent for the year. In comparison, the S&P 500 climbed a stunning 32 percent in 2013 for its best performance since 1997. In a Goldman Sachs survey conducted at the start of the year, hedge fund investors had indicated expected returns of 9.2 percent in 2013.

Jay Rogers, president Alpha Strategies Investment Consulting Inc., which advises hedge fund clients and managers, was not surprised by the underwhelming performance. He attributes the weak hedge fund performance to losses in short positions which many funds take to hedge positions.

Some Funds Outperform

Despite overall poor performance, there were some impressive winners during the year. UK’s The Children’s Investment Fund Management which has roughly $8 billion under management gained a stellar 47 percent on strong performance of its portfolio companies Airbus Group, Japan Tobacco Inc, and French engine producer Safran SA. Boston-based hedge fund Whale Rock Capital Management LLC did even better – gaining 53 percent during the year. Its bets include movie rental firm Netflix which tripled during the year. Whale Rock has $675 million under management with 40 percent of its portfolio on investments outside the US.

Other big winners include activist fund Glenview Capital Management LLC with a 43 percent return and Trian Fund Management LP with a gain of 40 percent. New York-based hedge fund Solus Alternative Asset Management manages $3.6 billion and specializes in distressed assets. It gained 32 percent last year. The $1.5 billion hedge fund Contour Asset Management LLC was another beneficiary of the strong outperformance by Netflix. Contour made its largest bet during the year in Netflix which helped the fund gain 40 percent.

An interesting winner during the year was the $2 billion Miami-based hedge fund Everest Capital, which specializes in emerging markets investments with a particular focus on China and Brazil. The fund shifted its focus early in the year towards stocks in the US and Japan, which resulted in the fund gaining 41 percent in the year.

Widely followed activist investor Daniel Loeb reported 25 percent return for his firm Third Point LLC, and another closely followed hedge fund manager Bill Ackman managed to generate 9.3 percent gain for his largest fund Pershing Square International Ltd., despite a big loss on his short position in multi-level marketing company Herbalife Ltd.

Job Market May Remain Subdued

Aggressive hiring is unlikely in an environment of continued underperformance by a vast majority of hedge funds over a prolonged period. Investor frustration over underperformance may also grow and could lead to greater outflows and smaller commitments. With many hedge funds struggling to deliver anticipated investor returns, cost will continue to be a factor and hiring will most likely be selective at best.

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