Big-money investors like pension funds are pulling money out of hedge-fund investments at the fastest pace in seven years as paltry market gains lead them to seek opportunities elsewhere.
About $19.75 billion was redeemed from hedge funds in January, the biggest outflow for the first month of the year since 2009, according to eVestment data cited by The Wall Street Journal
. Investors put $4.4 billion back in hedge funds the following month, much less than the $22.6 billion average for February from 2010 to 2015.
Hedge funds are facing difficulties with a stock market
that hasn’t moved much in the past 16 months and high-profile losses like Pershing Square Capital’s 20 percent drop this year. The fund had a significant unhedged holding of Valeant Pharmaceuticals International Inc., a drug maker whose stock has lost about 90 percent
of its value since August.
Hedge-fund commitments as a percentage of U.S. public pension-plan portfolios fell from a peak of 2.31 percent in 2012 to 1.37 percent by the end of 2015, according to Wilshire Trust Universe Comparison Service data cited by the WSJ.
Hedge funds are also facing competition from investment managers with lower fees. Hedge funds typically charge two kinds of fees: a 2 percent levy on the investor’s assets and a 20 percent cut of the fund’s gains. Some funds don’t get to collect fees unless they meet certain performance criteria.
The lower-fee funds, sometimes called “liquid alternatives” or "multi-asset,” can trade on low volatility or the direction of interest rates without using borrowed money to boost returns. Some competitors say they offer similar trading techniques for less than 1 percent of assets and a zero cut of any profits, the WSJ reported.
Hedge-fund fees are coming under pressure because of mediocre returns, according to the MoneyBeat blog on the WSJ website.
Performance fees fell to 17.7 percent in 2016 from 17.8 percent a year earlier, according to Hedge Fund Research data cited by MoneyBeat. Management fees dropped by 1 basis point to 1.5 percent last year, having fallen 3 basis points the year before.
MoneyBeat provides four ways
that investors can save money on fees:
- Invest in a start-up hedge fund or a fund trying to win investors back: “Start-up funds can be cheaper than long-standing funds if you opt for one that isn’t run by a big-name manager. Such funds are often keen to secure investors early on, in return for lower fees.”
- Invest in a European-domiciled fund: Most hedge funds are based in the Cayman Islands, and their fees are calculated based on each investor. European funds often calculate them for investors as a group, which can be advantageous for an investor.
- Haggle for lower fees: Funds often privately admit to being willing to charge lower fees for investors with a lot of money to deploy.
- Invest using a managed account: "A managed account is a separate pool of money run by the fund manager but still controlled by the investor. By using a separate, managed account, an investor can negotiate fee discounts, without the fund manager then having to give those same discounts to other big investors."
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