According to a report from Preqin, Reuters investors pulled $32 billion from hedge funds in the second quarter of 2022, spooked by inflation, geopolitical tensions and the war in Ukraine.
The outflows were the largest that the $4.1 trillion hedge fund industry had seen since the start of the coronaviruses epidemic in the first quarter of 2020.
The declines may continue as central banks raise rates, according to Preqin.
In September, central banks in Europe and North America increased interest rates in order to curb inflation. A surge in the U.K. government bond yield hit British pension funds, forcing some to seek emergency funds from companies that they manage money. The report said that global uncertainty put a lot of pressure on markets and forced investors to revisit their allocations.
The lacklustre second quarter returns has not encouraged investors to stay. Returns in North American-focused hedge funds fell 8.82%, while their European counterparts fared slightly better with 5.78% declines. The returns of the funds focused in the Asian Pacific Region fell by 4.45%.
Most of the outflows came from European-focused hedge funds, which saw $28.4 billion in the second quarter and $49.2 billion in total for the first half of 2022.
Europe's long-term performance trends lagged behind peers in the United States and the Asia-Pacific APAC region.
The last five years and including the first half of 2022, funds focused on the U.S. and APAC returned 8.55% and 6.90%, respectively, but European focused hedge funds only managed 3.5%, the report said.
The report said that hedge funds are poised to do their best when market stress has returned and that they use strategies that make use of macroeconomic indicators to trade trends in the markets.