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Business

Hedge funds’ wild equities ride could hit a wall: report

By
Carleton English
Published Jan. 23, 2018, 4:39 p.m. ET

Hedge fund investors piled into equity strategies in 2017, but the tea leaves suggest that bet may not bode as well for them in 2018 as it did last year.

“Historically this has been a bad sign for equity markets, in each instance the following year equities experienced low annual returns,” eVestment said in a report Tuesday.

More than $30 billion flowed into equity strategies last year — representing the third-largest inflow into equities since 2008, eVestment said.

By comparison, investors added $70 billion to equity strategies in 2014 and $32 billion in 2010 — both were years when the S&P 500 delivered returns in the teens.

But the following years weren’t so kind.

“It should be noted that in each of the following years (2015 &2011), the S&P 500 had its two lowest post-2008 annual returns (1.4 percent and 2.1 percent, respectively),” eVestment said.

As for 2017 flows, 40 percent of investors moved into equity strategies in the fourth quarter when equity markets had already experienced several record-breaking highs.

The S&P 500 gained 21.8 percent in 2017, and many on Wall Street are cautiously optimistic about the trend continuing.

Third Point’s Dan Loeb said in a letter to investors that “easy financial conditions and pending fiscal stimulus can sustain growth” but that he doesn’t see growth accelerating.