Investors' Performance Dictating Asset Flows in Tough Market

In tough year, client assets are chasing returns

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Dec 10, 2018
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The long-running bull market has proven challenging for many star hedge fund managers to outdo. With their underperformance, many have seen client assets disappear. But in some cases, investors have flocked to outperformance or at least remained with managers seeing gains.

Hedge funds have battled the effects of trade negotiations, slowing global growth and a flattening yield curve on the market in 2018. A measure of overall hedge fund performance, the HFRI Fund Weighted Composite Index, fell 0.16% for November, versus a 1.79% rise the S&P 500 index. Funds have lost 2% for the year to date, almost in line but still below the 1.93% decline in the index.

Outflows from hedge funds also ticked upward in the third quarter for the second consecutive quarter, rising to $4.6 billion, from $1.2 billion in the second quarter, according to Preqin Insights. Breaking the data down, Preqin found that macro strategies had the largest outflows at $9.0 billion, their third consecutive shrinking quarter. And, having the greatest difficulty attracting capital were firms with more than $1 billion in assets, of which only 27% generated inflows.

Preqin highlighted that returns made a sizable difference in where clients allocate their money.

“As ever, performance is key to attracting further capital investment,” the study found. “Among funds that have generated returns of 5.00% or greater over a three-year period, 38% experienced inflows. This compares to 23% of funds that posted returns of less than -5.00% over the same period.”

Some of the most celebrated fund managers have exemplified this trend in the value of their portfolios, GuruFocus data shows.

Known for his historic returns during the financial crisis years, John Paulson’s returns have suffered recently. Though he amazed market watchers by returning 6.28% when the market crashed 36.79% in 2008, his Paulson Partners Enhanced fund lost 35% in 2017 and 49% in 2016, Bloomberg reported.

Most client assets have also deserted the fund, leaving Paulson managing mainly his own money. In the third quarter, the value of his long portfolios shrank to $5.34 billion, from their 10-year peak of $33.79 billion in 2011.

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Similarly, the value of David Einhorn (Trades, Portfolio)’s Greenlight hedge fund declined to $2.37 billion in the third quarter, its lowest in a decade of history. Meanwhile, the fund’s losses grew to 28% for the year through November, Reuters reported, putting him on course for the worst year in his firm’s history. Einhorn’s strategy of shorting tech stocks such as Amazon (AMZN, Financial) and Netflix (NFLX, Financial), along with a 41% year-to-date drop in his largest holding Brighthouse Financial (BHF, Financial), have driven the underperformance.

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The assets-under-management grass has been greener elsewhere. Chuck Akre (Trades, Portfolio)’s Akre Capital Management – not a hedge fund – returned 14.87% for the first nine months of the year in its Akre Focus Fund Retail, compared to a 10.56% rise in the S&P 500. It also saw the value of its portfolio reach $8.56 billion after growing almost every year for nearly a decade. The firm’s assets under management have also risen to $8.1 billion, from $6.7 billion at the start of 2017.

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Akre’s returns have rested on solid stock picking. His largest position, Mastercard (MA, Financial), gained 30.5% year to date, and his second-largest, American Tower Corp. (AMT, Financial), rose 18.27%.

Few funds have outperformed the market this year, but assets have not changed drastically at another manager with several years of steady performance. Daniel Loeb (Trades, Portfolio)’s Third Point reached $17.7 billion in funds in March 2018, down from $18 billion in June 2017.

The value of his long portfolio also totaled $14.31 billion in the third quarter, its second-highest level in 10 years of history. Loeb has an annualized return of 7.38% (the period Preqin mentioned) versus 11.33% for the index.

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To see the changes in portfolio value of any fund manager GuruFocus tracks, go to their “profile performance” tab.

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