Is the "2 and 20" model finally dying?
After not only underperforming the market by 7 years in a row, but generally disappointing even relative to benchmarks, the hedge fund industry started off 2016 with such a deplorable P&L whimper that has even eclipsed the first months of the financial crisis.
Worse, after years of investors stoically refusing to redeem their money from underperforming hedge funds, their patience appears to have run out and according to eVestment data cited by Bloomberg, investors pulled a net $21.5 billion, the most in the opening month of a year since 2009, while losses led to a $43.2 billion drop in assets under management. Notably, hedge funds that suffered losses last year were hit by redemptions worth $24.8 billion in January.
As a result, assets managed by hedge funds globally last month fell to $2.96 trillion at the end of January; this is the first time the hedge fund industry has managed less than $3 trillion in AUM since May 2014.
As Bloomberg adds, equity, fixed-income and multistrategy hedge funds suffered net outflows, though interest in those betting on commodities rose for the fifth straight month in January as investors pledged $1.2 billion, the most since mid-2014.
"This is a major reversal of a trend which dates back to mid-2012,” eVestment said in a statement on Friday. “Hedge fund investors appear to firmly believe there are significant opportunities in the commodity space."
The surge of outside capital into commodities may explain why despite ongoing weakness in fundamentals across the commodity space, driven by both China and concerns about oil storage overflowing, there has been a strong base for crude in the upper-$20 range, and also explain the torrid jump in various metal commodities over the past two months.
But while it remains to be seen if hedge funds are right to rush into commodities, or just early, one thing is certain: one of the most prominent hedge fund activist investors, Bill Ackman, is certainly not having a good day and will surely be facing even more redemptions after not suffering a -17.3% return YTD, but also after today's massive surge in his infamous short Herbalife, which as of this moment is up nearly 25% after the company reported its long-running feud with the FTC may be close to conclusion.