Hedge Fund Investors Don’t Care About Outperformance During Bloodbath

Sep 5 2007 | 10:08am ET

Investors may be patient with top-performing hedge funds, but they aren’t stupid. That’s the finding of a new study from the Federal Reserve Bank of Dallas, and its truth is being felt across the hedge fund industry, which suffered its largest outflow in seven years in July.

The report—which pretty much gives away is conclusion in the title, “Hedge Fund Investors More Rational than Rash”—says that, over the past decade, the trend is pretty much what you would expect: Investors pour their money into hedge funds that outperform their peers.

But should trouble strike—say, trouble in the subprime mortgage market—they are quick to flee.

“Capital flight tend to occur once the funds’ longer-term performance sinks in absolute terms, irrespective of relative performance,” the report said. In other words, investors aren’t buying what credit managers have been selling: Yes, we are down, but not as down as our peers.

“This pattern suggests that sustained deterioration in fund performance, or even strong signals pointing in that direction, will lead to capital outflows,” the report, released Tuesday, said. “We’ve seen this scenario play out recently for hedge funds entangled in mortgage losses.”

“Except in exceptionally adverse circumstance, we find hedge fund investors tend to focus on longer-term rather than immediate performance,” the study notes. “We must never forget, however, that especially adverse performance can lead to more abrupt capital outflows.”


In Depth

FINalternatives Survey: We Asked Investment Pros...

Apr 2 2016 | 9:42pm ET

The data from our annual reader survey continues to roll in and provide interesting...

Lifestyle

Point72's Cohen Donates $275M To Veterans Mental Health Network

Apr 6 2016 | 8:31pm ET

Billionaire hedge fund manager Steve Cohen has formed a non-profit aimed at treating...

Guest Contributor

Agecroft: Why NYCERS Should Reconsider Exiting All Hedge Funds

Apr 18 2016 | 5:51pm ET

The recent decision by the New York City Employment Retirement System to exit its...