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Hedge funds have suffered their worst quarter in seven years after more than $15 billion was pulled out by investors starting to fight back against the high fees being charged across the industry.
The total amount invested in hedge funds fell to $2.86 trillion in the first three months of the year, marking the first time since 2009 that the sector has faced two consecutive quarters of net outflows, according to data from Hedge Fund Research.
Sharp market moves have wrongfooted many firms, leading to poor performances in the first quarter from funds such as Bill Ackman's Pershing Square, and rankling investors already disgruntled over fee structures charging 2 per cent for management as well as 20 per cent of profits. A broad index of hedge fund performance fell 0.7 per cent in the first quarter, according to HFR.
Fed up with paying "exorbitant fees" for poor returns, the New York City Employees' Retirement System has cut its $1.5 billion program, pulling money from managers including Perry Capital and Brevan Howard. The shift comes about 18 months after California's pension scheme also scrapped hedge funds from its portfolio.
At the same time, sovereign wealth funds have been withdrawing billions from asset managers globally as they turn their attention to supporting their own faltering oil-dependent economies.
Letitia James, public advocate for the New York pension scheme, attacked managers who "balk at negotiations for investor-favorable terms" believing they "could do no wrong, even as they are losing money".
"If they were truly fiduciaries and cared about our members, they would never charge large fees for failing to deliver on their promises," she said. "Let them sell their summer homes and jets, and return those fees to their investors."
The largest first-quarter redemptions in the sector came from macro strategies, which saw investor outflows of $7.3 billion, and event-driven funds, in which $8.3 billion was pulled — more than half from activist strategies.
However, some pension funds are also boosting their exposure to hedge funds. Finland's state scheme plans to invest $500 million in the sector this year, while the Illinois State Universities Retirement System is investing $500 million in hedge funds for the first time. US insurers are also tapping the sector to help generate returns.
Many managers, who often pool their own money alongside investors', caution that a volatile market is the worst moment to move away from hedged strategies.
"More up-and-down markets with a lot of dispersion should be a really good environment for hedge funds," said Judy Posnikoff, a founding partner of Pacific Alternative Asset Management Company, which invests in hedge funds. "If we're not in a bull market, where are you going to go?"