Whether At Hedge Funds or American Funds, Investors Voted With Their Feet

According to Hedge Fund Research Inc. data released last Thursday, due to hedge funds’ uninspiring performance, the $2 trillion industry saw net outflows of nearly $127 million in the fourth quarter of 2011, as nearly 60% of funds experienced outflows. In short, the data suggests that despite the recent rally, investors have become increasingly impatient with the punk returns put up by managers of all kinds.

The reason behind the investor exodus is simple. HFR data shows that hedge funds lost on average -5% last year.

“Clearly, 2011 was a year that was disappointing to investors…” in the hedge fund sector, said Ken Heinz, president of HFR. Global events “undermined… performance.”

Hedge funds have traditionally been a bright spot in difficult market and economic environments. For instance, 2011 was just the third year on record where the average hedge fund lost money.

And even though net withdrawals were only 0.007% of the industry’s total assets, not since 2009, when the market was recuperating from crisis, have investors taken more money out than they put in.

For the past three years since, hedge funds’ average returns have followed benchmarks set by stock indexes. Over that same time, the HFRI Fund Weighted Composite Index, a broad measure of hedge fund performance, produced an annualized return of 7.9%; meanwhile the S&P produced a return of 14.1%.

While funds holding at least $5 billion added to their assets, those between $1 billion and $5 billion were hit by investors’ redemptions. Additionally, HFR data illustrated that investors in the “equity hedge” strategies, those who concentrated on trading stocks, experienced outflows of nearly $8.7 billion at the end of last year.

Furthermore, market conditions have made it increasingly problematic for pensions and other similarly sized investors to reach their own return targets, frequently surpassing 8% annually just by holding stocks and bonds.

Despite the heavily publicized declines in 2011, total assets in the hedge fund industry were able to surpass $2 trillion in the fourth quarter once again due to market gains.

Also, Noel Kimmel Cantor Fitzgerald & Co.’s global head of prime services, which concentrates on hedge funds, remains hopeful.

“I understand that, directionally, the number is concerning… [however] all of the trends we see continue to be positive.”

In another sign that investors are unhappy with their investment returns, mutual fund giant American Funds, once the poster child of the advisor-sold mutual fund industry, is experiencing massive outflows.

Last year, the family of funds endured over $81 billion in outflows, more than the total funds at any other individual company or firm.

According to Kevin McDevitt, an analyst at Morningstar, the company’s losses, regardless of duration, stunned a number of advisers and investors.

Advisory firms’ changing to a fee-based business model is partially to blame for some of the company’s disappointment. This shift has taken place slowly but surely over the last 15 to 20 years, leading an increasing number of advisers to sell no-load funds rather than “load” funds sold by American Funds.

Another factor investors are paying more and more attention to in this low-interest environment is total management fees charged at funds. Although the bottom line in the fund business is and always has been the bottom line performance results, advisers are paying more attention to more reasonably priced passive investment products than the more expensive, actively managed funds.

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