Kristian Rouz — A quicker economic expansion and the rising bond yields and central bank interest rates are gradually taking their toll on the wealth management industry. International hedge funds posted their slowest growth in three years in 3Q18 as investor interest in safe-haven assets is fading amid the higher-yielding opportunities in the non-financial sector.
The report comes amidst the announcement that one of the world's biggest and influential funds is shutting down after 16 years of operation. San Francisco-based Criterion Capital Management, which oversees assets worth roughly $2 bln, cited unfavorable market conditions as the reason behind the move.
Additionally, Boston-based Highfields Capital Management with some $12.1 bln also said it would shut down — the same week as Criterion. Highfields has been in the market since 1998.
"Our 2018 results and those of the last few years have clearly not met either my expectations or yours," Jonathon Jacobson, the founder of Highfields, said. "No one feels worse about our lagging performance than I do."
Hedge funds have become the safest and highest-yielding investment vehicles over the past decade, characterized by a slow post-crisis recovery, tepid economic growth, and dismal corporate profits.
But investors figured real estate, stocks, and even the lower-yielding manufacturing projects appear to be more lucrative in the era of the Trumpian supply-side economics.
The rest of the world followed suit, as detailed in Hedge Fund Research's report. The hedge fund industry gained only 1.7 percent this year so far, a steep decline from the 4.4-percent expansion in 2017.
Meanwhile, the Dow Jones Index rose 6.99 percent year-to-date, exemplifying investor exodus from safe-haven assets.
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And even the profession of wealth manager is becoming less attractive as profitability fades, according to Highfields' Jacobson.
"Done correctly, money management is an all-consuming, 24/7 pursuit… After three-and-a-half decades of sitting in front of a screen, I realized I am ready for a change," he said.
Hedge Fund Research also found that macro funds have been the worst performers this year, as they have fallen flat in the first three quarters of 2018. This means any gains from investment made by these funds were offset by the massive capital outflow that they suffered.
Relative-value funds, the report found, performed the best, with average returns of 3.7 percent year-on-year, whilst event-driven hedges rose 3.6 percent. This suggests one-time money-making opportunities are still modestly popular — albeit still a far cry from last year, not to mention five years ago, when hedges ruled supreme.
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Meanwhile, equity funds rose 2.5 percent — and lagging behind the 7-percent expansion in the stock market. This likely points to huge capital outflows, as even if fund managers were idle, their returns would roughly match stock market gains — unless investors are pulling capital.
"While it has been, and continues to be, a very treacherous investment environment, and certainly not one very friendly to our style of investing, it is what it is, and no one feels worse about our lagging performance than I do," Highfields' Jacobson said.
Meanwhile, as Criterion is closing, its management decided to give investors their money back. The decision came after the majority of investors expressed their dissatisfaction with low returns and slow gains on their portfolios.
"Rather than impose a new framework on our valued investors, we… have decided to wind down the Funds while we formulate the next chapter," Criterion said in a statement.
Today, investors are moving capital into production and consumer-related sectors directly as fears of losses have diminished over the past few years. This change in investment patterns is expected to support the global economic realignment, focused on the development of national production capacity, rather than stockpiling wealth into supra-national piggy banks.