In the current climate, recent data adds to the debate on whether hedge funds justify their costs when fees are stripped out.

Fresh data shows that although macro hedge fund strategies bucked market trends in the first six months of 2022, the broad falls to equity and bonds dragged the entire hedge fund industry lower. And investors took $27.5 billion of money out of the sector.

A benchmark of returns, provided by research firm Preqin, showed a decline of 7.95 per cent during the three months to the end of June versus the first quarter of 2022. Ranking historical Q2 returns since 1987 also shows that this decline was the second largest quarterly decline since the 2008 financial crash.

But Preqin noted that hedge funds’ performance over the past 12 months (-8.15 per cent) was still superior when compared with S&P 500’s return (-12.52 per cent) during the same interval. 

Dispersion in performance was significant among hedge fund top level strategies. Relative value and macro hedge funds protected investors during the quarter, declining -0.24 per cent and -1.24 per cent, respectively. Multi strategy (-4.87 per cent) and credit (-4.53 per cent) fell but, given the level of volatility in the markets, these two categories performed “reasonably well,” Preqin said.

Equity and event-driven hedge funds did poorly, declining by 9.04 per cent and 7.61 per cent, respectively. 

The market declines have reduced investors’ appetite to commit new money. According to Preqin Pro, 79 per cent of investors plan to invest less than $50 million (the smallest allocation size) of fresh capital in hedge funds over the next 12 months, compared with 74 per cent of investors taking that view in the first three months of this year. Only 9 per cent of allocators are planning to invest between $50 million to $99 million, 8 per cent between $100 million to $299 million, and 4 per cent aim to put more than $300 million to work over the next 12 months. 

“Lack of attractive returns in 2022 has made investors nervous and is influencing the way allocators think about their hedge fund allocations,” Sam Monfared, vice president, Research Insights at Preqin, said. “Market volatility has spiked up and is unlikely to end in Q3. The positive is that plenty of dislocations have formed over the past few months, and this environment could create long-term opportunities for the industry and patient investors.”

Such figures continue to drive debate on whether hedge funds, which typically charge a higher annual management fee than long-only funds, as well as charging a performance fee, justify their costs when fees are stripped out. The past decade or so – with interruptions – was generally a strong one for long-only market-tracking funds such as exchange-traded funds, while hedge funds, with some caveats, had to work harder to justify their existence. With markets turning more volatile, some of those considerations have flipped.

Macro gains
Separately, figures from Hedge Fund Research, the Chicago-based firm, said its HFRI Macro (Total) Index gained +14.2 per cent in the first half of this year, beating the decline of the S&P 500 by 3300 basis points and the Nasdaq Composite Index by almost 4400 bps.

Negatively correlated macro gains offset weakness in directional and higher beta strategies, bringing the performance of the HFRI 500 Fund Weighted Composite Index to a decline of -4.1 per cent in the first half of 2022, HFR said.

Fears of recession and the impact for inflation encouraged institutional investors to remove an estimated $27.5 billion from hedge funds in the second quarter of this year, the highest quarterly outflow in more than two years. Total global hedge fund industry capital fell to $3.82 trillion.