2018 was a challenging year for hedge funds: a difficult Q4 for performance, coupled with a net $34bn being withdrawn from hedge funds, resulted in AUM dropping over the last six months of the year to $3.45tn as at December 2018. However, the industry is still 3x the size it was a decade ago, as investors recognize the ability of hedge funds to act as a portfolio diversifier and risk mitigator.
Following the Global Financial Crisis (GFC), faced with the prospect of not meeting long-term liabilities, many institutional investors turned to hedge funds and capital flowed into the asset class. Over the second half of this decade, however, capital entering the asset class has slowed and there are signs industry AUM may have begun to plateau. The rush to build up portfolios has slowed as many investors have reached their desired level of exposure. Our results reveal that four out of five investors plan to maintain or increase their exposure to hedge funds in 2019. We also expect investors to redeem and rebalance in favour of less correlated strategies to ensure capital is protected in the event of a downturn.
The outlook for 2019 is therefore nuanced. While the slowdown in growth may indicate a lack of activity, beneath the surface we expect high levels of movement of capital. Whether hedge funds can deliver this for investors will be crucial in 2019, and managers must recognize the specific needs of each investor and be able to adapt to them.
The Hedge Fund Journal’s premium content is only available to subscribers and those on our complimentary 7-day trial. Join today for the latest in-depth profiles and commentary covering the full spectrum of the hedge fund industry.