More evidence of indiscriminate hedge fund redemptions
| Jan 28th, 2009 | Filed under: Featured Post, Today's Post | By: Alpha Male |
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The media is now full of stories about successful hedge funds that – despite blowing the pants off both the market and their peers – faced significant redemptions in the fourth quarter of 2008. For example, here’s a story about one fund that was up over 100% last year and still lost over three-quarters of its assets.
Earlier today, Morningstar released its hedge fund asset flow estimates from November (final December data is not available yet). The firm reports that the funds it tracks lost $19 billion due to investor redemptions in November 2008. We backed out October’s redemptions from Morningstar’s QTD numbers and found that November was actually a bit better than October – which saw net outflows of $23 billion. Net outflows were close to zero by the end of Q3. So total net outflows up to the end of November totaled $44 billion according to the company.
But what’s particularly interesting about this data is the marked increase in redemptions experienced in November by top-rated hedge funds. As the chart below (constructed from Morningstar’s data) illustrates, November saw a dramatic increase in redemptions at 5-star funds.
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You’d provide readers a service if you reported on studies that show how hedge fund clients who have highest returns exhibit exactly that pattern: the most successful endowments are the least likely to go with a manager just because he did well in the past. The least successful hedge fund clients are the most likely to repeat.
As David Swenson has said, there’s a huge gulf in results between investors who understand what they’re buying and those who are just going through the motions. Buying into a fund simply because it had good historical results is what creates bubbles, Ponzi schemes and macro blowups. You might almost think society would be better off by declaring that investing in a fund, and staying with a fund, purely because of past performance, was prima facie evidence of irresponsible behavior.
Excellent point, Walt.