Investors In Hedge Funds Are Starting To Head For The Exits

There are signs that investors are becoming increasingly impatient with hedge funds and that 2012 will be an important year for this very rich $2 trillion industry.

Investors pulled $5.1 billion from hedge funds in April, according to BarclayHedge and TrimTabs Investment Research, and more than $12.7 billion flowed out of the hedge fund industry between May 2011 and April 2012. There were net outflows in 6 of those 12 months.

The simple reason investors are redeeming cash: performance. The average hedge fund lost money in 2011 and some of the industry’s biggest stars like John Paulson got crushed, while the U.S. stock market eked out a tiny gain.

The industry again trailed the S&P 500 stock index for the first four months of 2012, returning 5% versus a 11.2% gain for the S&P 500, TrimTabs and BarclayHedge reported. Those broad U.S. stock gains have evaporated for 2012, but that’s not necessarily a good thing for the hedge fund business.

Indeed, the same volatile market environment dominated by an unpredictable European debt crisis that proved so hard for hedge funds to navigate in 2011 returned in May. The early signs are that many hedge fund investors again had a tough time managing money through the volatility. Hedge fund titans like William Ackman and Dan Loeb saw their funds perform poorly in May. Research firm HFR recently said hedge funds on average lost money for the third straight month in May, although the major stock indices at least performed worse for the month.

Citigroup’s prime brokerage business claimed on Tuesday that hedge fund industry assets could double by 2016 to $5 trillion due to demand from pension funds, endowments and other institutional investors looking for new places to park their money. But it seems like those institutional investors might have second thoughts on jumping into the hedge fund pool if the the current crop of hedge fund managers don’t turn performance around soon.