Something strange is happening in the hedge fund industry

Hedge funds have produced ice-cold returns in recent years. That doesn’t seem to be deterring investors.

Banks and “wealth managers” — which includes high net worth investors, family offices, and investment companies, boosted their allocations to hedge funds last year — according to the latest annual
Towers Watson/Financial Times Global Alternatives Survey.

The increases were small — 1% or 2 % — but they went directly into new funds and also into funds of hedge funds, the one-stop shops that vet and select portfolios of hedge funds.

All of this begs the question of how to square data on steady or slightly increasing allocations to hedge funds, with news of withdrawals, hedge fund implosions, higher

scrutiny and pressure to slash fees amid lousy returns. The average hedge fund gained 2% last year, according to Preqin, the worst performance for the industry since 2011.
Robert Leonard, Credit Suisse’s global head of capital services, offered one explanation for the dichotomy in a Bloomberg TV interview Tuesday: Institutional investors are constantly tweaking their portfolios and recycling their allocations within hedge funds based on their performances and strategies, Leonard said. So yes, capital is coming out of the hedge fund industry, but these investors aren’t necessarily throwing the baby out with the bathwater.

And some investors, like pension funds and endowments, are just considered stickier investors with the least redemption activities, he said.

That’s one reason why hedge funds as a group aren’t doing as poorly as individual stories suggest. In fact, the industry now commands $2.7 trillion in assets, according to BarclayHedge. That’s a 69% jump from the $1.6 trillion in 2009.

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