Hedge funds saw record redemptions in the fourth quarter
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Alternative investing these days seems to mean finding an alternative to once red-hot hedge funds.
Well-heeled investors yanked a record $152 billion of their cash from hedge funds in the fourth quarter, and $155 billion for all of 2008, marking only the second year with net withdrawals since Hedge Fund Research began tracking the industry in 1990.
Total industry assets shrank to $1.4 trillion by year-end, from the mid-2008 peak of $1.9 trillion, according to HFR in Chicago. The decline includes the effect of redemptions and the drop in the value of the funds’ investments.
Another fund tracker, Hennessee Group, said its preliminary data counted much larger net redemptions in 2008 -- nearly $400 billion.
In any case, redemptions weren’t surprising given the industry’s dismal performance. HFR’s primary hedge fund index skidded 18.3% last year, and other research firms estimate the average fund loss at more than 20%.
Although an 18.3% loss was far less than the 38% plunge in the Standard & Poor’s 500 stock index, many hedge fund investors may have been expecting their managers to protect them from any decline in double digits -- particularly given the steep fees the funds levy.
What’s more, some hedge fund investors were fleeing even before markets suffered their worst losses beginning in October. Those early redemptions helped fuel the markets’ fall meltdown, as hedge fund managers were forced to sell assets to repay departing investors.
The heavy pace of cash withdrawals in 2008 demonstrates how hedge funds have quickly fallen from their perch as the trusted financial preserve of the monied class. Even seemingly sophisticated investors aren’t sure where to put their cash.
Even fund categories that notched gains last year suffered net redemptions, according to HFR.
Fears about the turmoil savaging the financial markets have been magnified by the Bernard Madoff scandal, which has cast doubt on whether hedge fund screeners adequately scour the funds into which they pour clients’ money.
‘Investor risk-aversion remained at historically extreme levels through year end,’ said Ken Heinz, HFR president.
Hedge funds aren’t the only alternative-asset class struggling with tough times: Private equity funds invested less than $25 billion in the fourth quarter, an 87% plunge from the $185 billion they put to work in the final quarter of 2007, according to research firm PitchBook Data Inc.
Hampered by the inability to get financing, especially for the billion-dollar buyouts that fueled the private equity boom in recent years, the number of completed deals slumped to a five-year low of 251, according to PitchBook.
-- Walter Hamilton