Hedge Funds Suffer Massive $22.5 Billion In Q4 Outflows

While there were countless arguments offered to explain December's near-record market drubbing, we said on several occasions last month that the simplest reason for last month's plunge was also the simplest one: faced with a mountain of redemption requests, hedge funds were forced to sell their holdings into a market that had never been more illiquid, which meant hitting each and every bid and culminating with the brief, December 24th bear market.

We now have confirmation, because according to Hedge Fund Research, investors fled hedge funds as markets plunged in the fourth quarter (or is that markets plunged as investors fled hedge funds), pulling a massive $22.5 billion, the most in more than two years. The exodus added to the total withdrawals of $34 billion in 2018, or about 1% of hedge fund industry assets, the largest quarterly outflow since Q4 2016 when investors redeemed about $70 billion.

Large fund outflows were concentrated in several firms which closed and returned capital to investors, with approximately two dozen firms experiencing net asset outflows of greater than $500 million for the quarter. Despite the overall negative trends on flows and performance, but reflecting the trend of larger hedge fund relative outperformance, approximately one dozen firms received net asset inflows of greater than $500 million for the quarter.

Flows by firm size also showed net outflows across all firm sizes, with firms managing greater than $5 billion experiencing outflows of $15.6 billion. Mid-sized firms managing between $1 and 5 billion saw outflows of $2.8 billion for the quarter, while firms managing less than $1 billion saw outflows of $4.1 billion.

"Hedge fund outflows in 4Q were driven by several factors, most notably investor reaction to steep losses in traditional asset investments and the sharp spike in equity market volatility leading to redemptions" stated Kenneth J. Heinz, President of HFR.

The spike in redemptions came as hedge funds suffered their worst performance since 2011 in a year marked by two corrections, a bear market, and a spike in year-end volatility.

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