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Hedge fund hate: More cash likely to flow out again this year

Hedge fund managers had a rough year in 2016, and pretty much none of their customers were happy about it.

At a time when legendary investor Warren Buffett has almost nothing nice to say about big money managers, investors say they plan on allocating less money than they did in 2016. During that year, hedge funds surpassed $3 trillion in total assets but also saw some $110 billion walk out the door as investors grew unhappy with sub par returns.

In all, just 3 percent said returns for the year topped expectations, according to a survey of managers and investors conducted by industry tracker Preqin. Only 31 percent said returns met expectations, while 66 percent said returns fell short.

Of course, hedge fund investors are a fickle crowd. Back in 2013, when the industry rode a red-hot stock market to a 9 percent gain, a mere 21 percent said returns beat their hopes.

Yet coming on the heels of a big year for outflows, another weak performance could siphon even more cash out. Meanwhile, Buffetttook aim at hedge funds in his annual letter released on Saturday, excoriating them for charging big money for advice that has largely under-performed low-cost index funds.

"Preqin's interviews with investors at the end of 2016 indicate that the fundraising challenges of the past year show little sign of abating in 2017," Amy Bensted, the firm's head of hedge fund products, said in a statement. "This is undoubtedly a concern for firms in terms of both
retaining capital and fundraising over the year."

Indeed, investors indicated a strong likelihood that they'll be putting their cash to work elsewhere.

For 2017, 38 percent of those surveyed said they are planning on reducing cash allocations, the highest level recorded in data going back to 2009. Those willing to maintain their current allocation numbered 43 percent, while only 20 percent plan to increase, with both numbers being at their lowest in the data set as well.

However, the attitude towards hedge funds depends on strategy.

Dollars cash
Adek Berry | AFP | Getty Images

The group most out of favor with investors is funds of funds, which hold portfolios of other funds rather than invest in their own strategies. Of that group, 29 percent say they will decrease exposure, while only 13 percent plan to increase.

Activist fund managers—think Carl Icahn, Dan Loeb or Bill Ackman—also got poor marks, with 20 percent planning to decrease exposure and no investors planning to increase. Activists actually did well in 2016, collectively gaining 10.4 percent against the S&P 500's 10 percent increase and an industry wide return of just 5.4 percent, according to Hedge Fund Research Inc (HFRI), a fund research and data firm.

The strategy likely to pull in the most money proportionately is relatively value, for which 26 percent of investors plan to increase allocation, with only 6 percent expecting to cut.

Despite the likelihood that cash will be leaving, the industry can expect to see more funds introduced after a decline in 2016. Preqin said 37 percent of respondents said they plan on launching new funds, two-thirds of whom indicated that would happen in the first quarter.

Total funds fell 2.3 percent last year to 9,893, according to HFRI.