TOKYO -- Once wielding powerful influence on global financial markets, hedge funds are losing customers as more investors shun their high fees amid poor returns.
Hedge funds tracked by Eurekahedge saw fund outflows of $60.7 billion by the end of February since April 2016. This is the greatest sum since the $426.9 billion exodus seen in fiscal 2008, during the financial crisis.
"Hedge funds have been failing to meet customers' expectations" due to weak investment performance, says Masakazu Yanagisawa, co-head of equity sales at Deutsche Securities in Japan.
As institutional investors, hedge funds manage pension funds and assets of the affluent. During the 1990s, they would often yield an annual 20-30% returns by capitalizing on advanced expertise like shorting.
But in recent years, their performance has languished. For eight consecutive years since fiscal 2009, hedge fund investments have underperformed the Standard & Poor's 500 index.
Monetary easing by key economies has created a surplus of money around the world, and managing the enlarged assets has not been easy. Then unexpected political shocks like the June 2016 British vote to leave the European Union and Donald Trump's win in the U.S. presidential election roiled markets last fiscal year.
The high cost of investing through hedge funds are another factor. Normally the basic fee is 2% of assets under management. And when investment profit tops a certain threshold, a 20% commission on the profit is collected in many cases. As a result, criticisms of hedge funds are increasing. Renowned U.S. investor Warren Buffet says global investors have "wasted" $100 billion over the past decade by investing via hedge funds.
Such large institutional investors as the California Public Employees' Retirement System (CalPERS) of the U.S. have been withdrawing from hedge funds. Often the freed-up money is instead put into low-cost vehicles like exchange traded funds (ETFs).
A major Japanese financial institution is also decreasing hedge-fund investments. "The returns are not worth the fees," a staffer explains.
As ultralow interest rates erode returns, awareness of investment costs is ever greater, says Toshinori Kurisu of Nippon Life Insurance. Some funds have lowered fees, but as the investment environment kept worsening, more hedge funds closed in fiscal 2016 than newly opened. This was not the case even in 2008. Eton Park Capital Management, founded by a former Goldman Sachs partner, was among those to shut down.