USD103bn Redeemed From Hedge Fund Industry In Q1

by Leroy Baker, Tax-News.com, New York

24 April 2009

Investors continued to withdraw capital from hedge funds in the first quarter of 2009, redeeming nearly USD103bn, according to data released by Hedge Fund Research on April 21. The USD103bn redemption figure represented 7.3% of industry assets, but did not exceed the record for quarterly withdrawals set in Q4 2008, when investors withdrew over USD152bn from the hedge fund industry.

Indicative of continued investor pressure, withdrawals from Fund of Hedge Funds totaled USD85bn for the quarter, exceeding the Q4 2008 redemption total of USD50bn, and accounting for the majority of capital withdrawn from the total hedge fund industry. Funds of Hedge Funds, which experienced a record performance decline of -21.3% in 2008, posted a performance gain of 0.47% in the first quarter, in line with overall industry performance.

Partially offsetting the industry asset decline, the HFRI Fund Weighted Composite Index posted a gain of 0.53% for the quarter, resulting in a performance-based gain for the industry of approximately USD28bn. This figure is in sharp contrast to the performance-based losses of more USD162bn which occurred in Q4 2008, during which the HFRI Fund Weighted Composite lost over 9%.

Total hedge fund industry capital declined to USD1.33 trillion as of the end of Q1 09, USD600bn below the industry asset peak at the end of Q2 08 and USD75bn below the year-end 2008 asset total. Capital invested in Funds of Hedge Funds declined to just over USD525bn, USD300bn below its peak, also achieved at the end of Q2 08 and USD68bn below the year-end 2008 level.

Investor withdrawals continued to exhibit a lack of sensitivity to strategy performance, as USD16bn was withdrawn from Macro strategies, an area which gained nearly 5% in 2008. Investors also withdrew USD27bn from Relative Value strategies, which posted performance gains of nearly 4.5% in the first quarter.

The strategy that experienced the largest capital redemption was Equity Hedge, which had USD35bn of capital withdrawals, despite posting a gain of nearly 3% in
March, the strategy’s strongest month since October 2007.

“Extreme investor risk aversion subsided into the end of the first quarter, but remained at elevated historical levels as industry consolidation continued through quarter end,” said Kenneth Heinz, President of Hedge Fund Research. Adding: “In addition to performance, investors are focused on structure and transparency, and the industry is in the process of evolving to meet these demands.”

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