September Redemptions From Hedge Funds Turn Q3 Flows Negative, YTD FlatGuest Post
Redemption pressures toward the end of a quarter are nothing new. In each of the last six quarters, investors have removed more money than allocated, and this theme holds true across twelve of the last thirteen quarters, too. The redemptions in September, however, were above normal. Not only were they a few billion larger than the average net outflow in the aforementioned span, but they resulted in Q3 flows turning negative, and brought year-to-date flows to nearly flat.
The industry is indeed growing, but it’s not growing from new allocations. Over the last three years, investors have removed over $100 billion from the industry, but performance gains have far more than offset these losses. Overall asset increases cannot hide the fact that over the last twelve quarters, investors have been net redeemers in eight of them. Growth is stagnant, and returns have not been making an impact on investors to broadly return.
- September redemptions from hedge funds push Q3 flows negative, and YTD net flows near zero.
- Managed futures outflows continued for a seventh month, and macro flows shifted negative in September.
- Event driven funds saw a second consecutive month where redemption pressures eased.
- EM flows were negative for a fourth consecutive month, yet Asia-domiciled funds saw net inflows.
September Redemptions Turn Q3 Flows Negative, YTD Flat
Investors removed an estimated $14.72 billion from hedge funds in September pushing Q3 net flows into negative territory with an estimated $5.71 billion leaving the industry in Q3. Year-to-date net flows are essentially now flat with a very slight net $70 million inflow. Total industry assets sit at $3.310 trillion.
- September’s redemptions were larger than normal.
It is has been the norm over the last six quarters for there to be a wave of redemption pressure in the last month of the quarter. In each of the last six, and twelve of the last thirteen, there has been a net outflow in the final month of the quarter. Over those thirteen months, the average net flow (including the one month with net inflow) was an outflow of $11.85 billion. September’s outflows were larger than normal, but the norm has indeed been for there to be quarter-end redemption pressure.
- Industry asset levels are rising, slowly, despite redemptions.
Over the last three years, the average quarterly industry asset change has been about +0.70% per quarter, despite quarterly net outflows in eight of the last twelve quarters. In this span, performance has added about $380 billion and investors have removed about $110 billion.
- Managed futures funds face seventh consecutive month of redemption pressures.
Managed futures strategies are paying the price for their volatile returns of 2017 and early 2018. If we could find a positive theme, it would be that performance has been improving in an increasingly volatile market.
- Event driven funds had net positive flows for a second consecutive month.
While there were a handful of strategies with solid allocations in September, the more apparent reason for the net inflow in September is the wave of redemption pressures that has been washing over event driven funds for several quarters seems to have abated. With solid returns for most within the group in 2017 and 2018, the recent net inflows more accurately reflect the general sentiment toward the universe of products.
- Macro funds face uncertain remainder of 2018.
Macro is the leading asset gaining segment of the industry this year, and is the only major strategy for which >50% of products have net inflows in 2018. Returns have recently been volatile including large asset weight declines in August. This is a diverse group, however, and there are large managers outperforming and seeing inflows as a result.
- Long/short equity redemptions rise, year-end will be interesting.
A volatile start to the year, followed by elevated losses in June appears to be weighing on long/short equity fund flows, which are now firmly negative YTD. Asset-weighted returns have more recently improved, which could go a long way in retaining assets into year-end. While December outflows have been the norm in the industry in recent years, long/short equity funds have been able to buck this trend.
Redemption Pressures for Emerging Markets Funds Enters Fourth Month, while Asia-based firms see mixed, yet positive flows
- Even though EM flows were negative, for the majority flows were near flat.
There were a small handful of products which dominated the EM hedge fund flow landscape in September, however we can tell little about EM sentiment by their flows. For example, the second largest outflows came from a product focused on China fixed income opportunities, but there was a nearly offsetting amount of money allocated into a thematically similar product, and a multi-strategy China fund. Overall, the quarter-end sentiment toward EM appears to be wait-and-see.
- A familiar group of products have been dominating flows for Europe-domiciled firms in 2018.
Of the ten products from Europe-domiciled firms with the largest redemptions in 2018, nine of them had among the largest redemptions in September as well. Dominating the group are systematic products within both the managed futures and macro space.
- Asia-domiciled managers saw a rotation of flows in September.
Similar to the theme in the first bullet, there were a mix of Asia-domiciled managers dominating flows in September, but September flows for each of the firms were counter to the year-long trends they had been seeing. The result was that Asia-domiciled manager net flows were positive in September, while the overall industry’s outflows were elevated to the downside.
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Article by eVestment