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Hedge funds saw their biggest loss of investor cash since the bull market in stocks began, even though the industry turned in its strongest performance in three years.
In all, hedge fund clients pulled $106 billion, the biggest exodus since 2009, as investors protested low returns that come with high fees, according to industry tracker eVestment.
"Investor flows for 2016 resembled an industry in crisis," eVestment said in a report. "They were similar to mid-2011 and 2012 in persistence, but dwarfed outflows seen during the European sovereign crisis in magnitude. They were below the levels seen during the aftermath of the great financial crisis, but have been much more persistent."
Indeed, hedge funds have seen net outflows for five consecutive quarters. The final three months of 2016 featured a surge of $43.2 billion in redemptions, the worst since the first quarter of 2009 as the economy was still trying to climb out of the Great Recession and the financial crisis. In December alone, investors pulled $23.7 billion.
The investor withdrawals came after a terrible year for the industry. In 2015, hedge funds as a group showed a loss of 0.72 percent, according to eVestment's count, in a difficult overall year for investing.
The good news is that 2016 was significantly better, with eVestment's tracker showing a 5.34 percent gain, the best since 2013. Even though that was below the 's return of nearly 10 percent (11.96 percent with dividends included), investors may warm again to hedge funds.
Hedge funds that performed well saw investor cash come in, while it was those that performed worst that saw the biggest outflows, eVestment said.
"If you did well last year, there was interest. If you did poorly, then a lot of money came out," Peter Laurelli, head of research at eVestment, said in an interview. "That was true for both larger funds and smaller funds."
In fact, investors made some severe miscalculations during the year.
Funds that invest in distressed companies were the industry's best performer, turning in an 11.5 percent gain. However, those funds actually saw a net $6 billion outflow. The only hedge fund strategy that saw net inflows for the year was managed futures, which took in $10.3 billion but eked out just a 0.8 percent gain, according to eVestment.
Despite all the outflows, hedge funds actually ended the year with more money than they had going in, thanks to $119.9 billion in performance gains. Total assets under management ended at $3.04 trillion, according to eVestment's count. (Fellow industry tracker HFR puts the total just shy of the $3 trillion mark.)
Laurelli thinks investors will give hedge funds another looking 2017 after seeing the positive returns last year.
"The traditional long-only landscape is more uncertain that it has been in the last several years. So there will be more coming in for those managers who have shown they can do well," he said. "The numbers for (2016) were bad, but I don't think 2017 will be quite as bad."