Some Hedge Funds Return Money To Investors Citing Fewer Opportunities

October 21, 2013

Some prominent hedge fund managers are returning part of their capital under management to investors on concerns that the continued rise in the US stock market on the back of easy monetary policy has made it difficult to find attractive investment opportunities. Hedge funds that have recently decided to return money to investors include value investment firm Baupost Group, which manages roughly $28 billion in assets, and Boston-based Highfields Capital, which manages approximately $13 billion. Besides these two hedge funds, there are other funds such as Third Point LLC of New York, Viking Global Investors of New York, Lone Pine Capital of Connecticut and Blue Ridge Capital of Georgia that have stopped taking in new money to limit the fund size.

Fewer Investment Opportunities Prompt Trimming Size

Image: Life On the Buy Side

In his quarterly letter to investors, Seth Klarman, who runs the hedge fund Baupost says there aren’t sufficient opportunities to put all the cash to work. Klarman did not disclose the amount of capital he intends to return to investors but the decision to return investor money is only the second time in its 31 year history the fund is voluntarily limiting its size. Baupost generated returns of approximately 8 percent through July this year after deducting all fees. It has a strong track record of generating annualized return in the high teens since inception.

Hedge fund Highfields Capital was more specific and disclosed that it intends to return between 5 and 15 percent of its capital to clients. Its fund manager Jonathon Jacobson wrote to investors, “It has become increasingly difficult to find new compelling investments given today’s low interest rates and how much equity multiples have expanded over the past 12 months.” Highfields Capital is among the better performing hedge funds this year generating gains of approximately 18 percent after fees in the first nine months of this year.

Hedge Fund Assets At New All Time High Of $2.51 Trillion

Data published by research firm Hedge Fund Research shows that hedge fund assets at the end of September were $2.51 trillion. This is the fifth straight quarter in which the assets under management have hit a record high. During the third quarter, hedge fund assets rose by $94 billion, aided by performance and $23 billion in new money through inflows.

Continued investor interest in hedge funds comes despite yet another quarter of underperformance by hedge funds against the broader stock market index. During the quarter, the average hedge fund returns were 3.24 percent, lagging the 4.7 percent gain in the S&P 500 index. Hedge funds also lagged the S&P 500 in the first two quarters this year.

No Momentum In Hiring

Despite all time high assets under management, the continued inability of hedge fund managers in recent years to outperform the broader index is likely to keep the hiring for traders and analysts in check. A new survey by KPMG reveals that some hedge funds are spending up to 10 percent of their operating costs on compliance costs suggesting that hedge fund hiring is focused on the operational side than the trading side.

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