Underperforming Hedge Funds Fade From Radar

For all the attention paid to hedge funds and the headlines devoted to liquid alternative investments, few advisors admit to any familiarity with hedge funds.

Despite hedge fund managers providing a rich source for tabloid fodder, the fact that hedge funds aren’t front and center for many advisors may be a good thing. The performance of the hedge fund industry has declined, particularly since the 2008 financial crisis.

A recent survey of financial advisors found that only 49 percent of respondents were “somewhat familiar” with hedge funds and 23 percent were “not very familiar” with them. Only 28 percent of advisors said they were familiar with the products, the survey found.

When asked if they would recommend a hedge fund to their clients, 28 percent of advisors said yes, 48 percent said no, but would consider it. Twenty-four percent said they had no plans to recommend hedge funds to clients, the survey found.

The survey data were compiled by Wealth Management Magazine and published in 2014, and a recent analysis of the data was conducted by Tiburon Strategic Advisors, of Tiburon, Calif.

With interest rates low for many years, advisors want to improve yields on their clients’ portfolios. One place to look is to hedge funds and higher risk alternative investments, but ones with liquidity that can be sold easily – so-called liquid alternatives or liquid alts.

Hedge Funds Underperform

Hedge funds, which were consistent performers for many years in the late 1980s and into the 1990s, saw their returns trimmed beginning in 2004, said Chip Roame, managing director of Tiburon, in a webinar Friday.

In the 2013-14 fiscal year, CalPERS, the California employee pension fund, found that its hedge fund program generated a return of only 7.1 percent, far below the 24.8 percent return of the fund’s global equities program, Roame said.

Since 2010, hedge funds and liquid alternative managers have gathered between $34.4 billion and $71.5 billion in assets every year, and hedge fund and liquid alternative managers have grown industry assets to eye-popping heights.

Hedge fund and liquid alternative managers finished 2015 with a record $3.2 trillion, up from $2.8 trillion in 2014, Roame said. Hedge funds managed only $42 billion in 1988.

While net flows into hedge funds and liquid alternatives are expected to continue mixed returns, the closure of many funds and more regulation will make it more difficult for hedge funds to outperform other investment categories.

That means advisors can expect hedge funds to enter into a cycle of consolidation as funds merge or close, Roame said.

InsuranceNewsNet Senior writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].

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