The hedge-fund industry, while still struggling with performance and fund closures, appears to be turning a quarter after a horrendous 2016.
Hedge-fund assets hit a record $3.15 trillion in the third quarter, according to data from Hedge Fund Research, the fifth straight quarterly record, and up $50 billion from the second quarter.
While some of the asset growth was due to the broad market rally that is lifting security prices — the S&P 500 SPX, +0.03% rose 4% over the third quarter — investors have also been trickling back into the investment vehicle, which has struggled for years amid a broad shift to passive vehicles. Such investments are both significantly cheaper than hedge funds and have long boasted superior performance amid the multiyear bull market, a trend that persists.
There were net inflows of $1.7 billion in the third quarter, which represented a slowing from the prior quarter, when $6.7 billion flowed into hedge funds, snapping a six-quarter streak of outflows. In a press release, HFR noted that “though the year-to-date inflow total of $2.5 billion remains muted, it represents a sharp reversal from the $70 billion of investor outflows in 2016.”
2016 was a rough year for the industry even outside of the investor retreat. More than 1,000 hedge funds shut down last year, the most in any year since 2008, during the worst of the financial crisis. That occurred despite a generally positive market backdrop; the S&P 500 rose 9.5% over 2016.
Thus far this year (through the second quarter, the most recent date for which HFR has data available), 481 hedge funds have shut down, compared with the 369 that have been launched. 2017 is on track to be the third straight year that the number of liquidations have outpaced the number of funds coming to market.
Currently, there are 9,730 hedge funds on the market, compared with 9,691 in the second quarter.
The return of inflows may be a reflection that investors view the U.S. stock market as overvalued by many metrics, which could be leading high-net-worth investors to diversify their holdings through hedge funds. The sophisticated investment products, which have great flexibility in what they can invest in, are traditionally used as a way to “hedge” against market losses
Ted Seides, the former Protege Partners executive who recently lost a 10-year bet with Warren Buffett over whether hedge funds or the S&P 500 would do better over a decade-long period, recently suggested that he would win in a rematch, given the valuations of the benchmark equity index.
Thus far this year, performance hasn’t been on the side of hedge-fund managers. The HFRI Fund Weighted Composite Index rose 2.3% in the third quarter, bringing its year-to-date advance to 5.9%, significantly below the 14.4% rise of the S&P in 2017.