Hedge Funds

There's a successful hedge fund strategy that's bucking the $34 billion outflows

Investors withdraw $34 billion from hedge funds in H1 2016: Prequin

Investors pulled a net $34 billion from global hedge funds during the first half of 2016, according to research from data provider Preqin, but the fund flows also reveal several clear strategies that are proving successful within the industry.

"Growing concern from investors regarding the recent performance of the hedge fund sector has manifested as two consecutive quarters of net outflows, taking the total size of the industry to approximately $3.1 trillion as of the end of (the second half of) 2016," Amy Bensted, the head of hedge fund products at Preqin, said in the report at the end of August.

The research - which uses the company's online hedge fund tool - revealed credit and equity strategies bore the brunt of the outflows, losing a net $26 billion and $25 billion respectively during the six month period.

However, CTAs were much more in favor, managing to net $11 billion of inflows. These are commodity trading advisers (CTA) which focus on the buying and selling of specialized financial contracts, such as futures, related to commodities investments. While many use systematic trading or follow trends, discretionary CTAs also exist. And the good times look set to continue for this particular niche, with investors planning to allocate the most net new money to this strategy during the remainder of 2016.

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Nonetheless, in a worrying signal for what lies ahead, Preqin survey data showed that a whopping 79 percent of investors found hedge funds had fallen short of expectations in the past twelve months – a notable spike up from a total of 39 percent who made the same claim only half a year earlier. This tallies with Preqin's finding that 47 percent of investors cite falling confidence in hedge funds' ability to deliver versus a 12 percent minority who say their faith in the industry has improved.

Benchmark industry returns of only 1.09 percent for the first half compared to a 2.69 percent return for the , a 2.9 percent return for the Dow Jones and a 4.2 percent for the FTSE 100. The typical hedge fund charge of 2 percent of assets under management plus 20 percent on returns quickly eats into such meager gains.

But in defense of performance this year, perhaps hedge funds should be hedging and allowing investors to safeguard their assets and withstand volatility in all types of market climate, rather than chasing excess returns?

In that regard, Brexit was a good example of hedge funds doing exactly what they say on the tin, according to GAM Portfolio manager, Anthony Lawler.

"Hedge funds in aggregate took down risk going into Brexit. Apart from a couple of outliers who did bet on an outcome … most other managers pared back risk or stepped aside as the vote outcome was by definition binary and was in general not considered a good quality bet to make either way," Lawler told CNBC Thursday.

Hedge funds struggle in 2016

The pressure on fees is harder to ignore, especially against a backdrop of increasingly popular automated trading and continued net flows out of active management and into passive strategies. Indeed, fund manager Hargraves Lansdown which handles £60 billion ($79 billion) of client assets has just added 13 tracker funds to its list of most recommended funds.

"Tracker funds have gone from strength to strength in recent years in terms of popularity, with investors using them in tandem with active funds to build a balanced portfolio. Cost has really come under the spotlight thanks to the tracker price war, and we continue to negotiate fund fees down for both active and passive funds on behalf of our clients." Laith Khalaf, a senior analyst at Hargreaves Lansdown told CNBC.

Khalaf went on to contend that the pressure on hedge funds to reduce fees will only continue, saying: "There is still a rump of funds which are charging too much for lackluster performance, but we expect this to be a dwindling breed as investors continue to vote with their feet in favor of high quality active funds or low cost tracker funds."