A Short Explanation For Why Investors Are Still Leaving Their Money In Hedge Funds Despite Dismal Returns

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Photo: Deutsche Bank

Hedge funds have had a rough last few months.  Even the once wildly profitable hedge fund titan Ray Dalio saw his fund down 2.7% for the first half of 2012.  Despite all that bad news, this morning, FINalternatives, reported that the GlobeOP Financial Forward Redemption Indicator for July shows that client redemption requests for hedge fund investments are at near historic lows for the GlobeOP Indicator.

The Forward Redemption Indicator for July registered at 2.18%, which is down from 3.17% in June.  This number represents the sum of forward redemption requests that hedge funds receive from their investors, which is divided by the hedge fund’s assets under management. 

Bottom line: Investors are leaving their money in hedge funds, even as they receive negative returns and pay management fees. The question is why.

We spoke with a hedge fund research consultant about the topic, and he said that “the short story is that hedge funds still did better in Q2 than most long only indices, so on a relative basis, hedge funds outperformed.  Why redeem your better performing asset?”

The consultant also pointed out that during the second quarter, there was a lot of asset movement as investors tried to rebalance their investments as the global markets continued to be choppy.  And, with the uncertainty in the market, the relative value strategy which profits from volatile bond/equity relationships, has been popular among hedge funds.

On top of all that, asset flow into large, institutional hedge funds remains quite strong.  

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