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Sep 21, 2015

Activist hedge funds face losses and investor redemptions amid market volatility

Activists post second-worst performance among hedge funds in August

Activist hedge funds are facing redemptions and increased pressure from investors after suffering heavy losses in the summer amid volatility in global markets, according to media reports.

The performance of activist hedge funds was the second worst of any category of hedge funds in August, with average returns of negative 3.41 percent, the Financial Times reports. Only Asia-Pacific hedge funds focused on the Chinese market performed worse, with average returns of negative 3.68 percent.

The ‘concentrated portfolios’ mixed with a ‘long-term horizon’ of activist hedge funds leaves them vulnerable to sharp swings in the market that may make many investors uncomfortable, Lyxor Asset Management’s senior strategist Philippe Ferreira tells the newspaper, adding that his own firm has reduced its exposure to activist hedge funds in anticipation of further performance issues.

In the first eight months of this year, activist hedge funds suffered losses of 2.4 percent on average, compared with average losses of 1 percent in the wider hedge fund industry, the newspaper reports, citing David Walker, head of institutional research at Cerulli Associates.

He says European pension funds are among investors most likely to reconsider their investments in activist hedge funds amid market volatility.

In its September report, data intelligence firm Preqin says investor dissatisfaction is hitting the entire hedge fund industry amid sharp losses in China and increased volatility elsewhere.

‘Investor dissatisfaction with the returns of hedge funds, coupled with a large proportion of investors feeling their interests are not aligned with those of their fund managers, has left a large proportion of investors questioning the value of hedge funds as part of their wider portfolios,’ says Amy Bensted, head of hedge fund products at Preqin, in the report.

‘In light of many investors playing closer attention to their hedge fund investments, and some putting portfolios on ice, fund managers have reported fund-raising becoming more challenging. Navigating the volatile markets and generating strong returns will be key over the rest of the year, in order to prove the value of hedge funds to investors as a means of reducing portfolio volatility and generating long-term risk-adjusted returns.’