Hedge Fund Redemptions Continue Into OctoberGuest Post
Redemptions from the industry to begin Q4, along with elevated performance losses in October from many strategies, does not bode well for the remainder of 2018.
Given that, historically, December has been a month where outflows are elevated even in otherwise positive years, it is highly likely that 2018 will end up as a year of net redemptions from the industry. Since at least 2004, that has occurred only three other times, in 2008 and 2009 (though the latter was only due to outflows in Q1 2009) and again in 2016.
Since Q4 2015, investors have removed a net amount of $121 billion from hedge funds.
That said, there are products able to gain assets during these otherwise difficult times. Investor allocations have shown that periods of positive results will not simply be rewarded, however consistency over longer periods consistently produces new allocations, and the industry has many managers able to do just that.
Highlights From This Report
- Industry redemptions continued into October, flows now firmly negative YTD.
- Macro managers saw elevated redemptions in October, and managed futures redemptions continued.
- Equity strategy flows were positive, though investors have shown preference for market neutral over directional strategies.
- EM fund flows were negative for the fifth month, though there are pockets of new allocations.
Hedge Fund Redemptions Continue Into October
Investors removed an estimated $7.13 billion from hedge funds in October, pushing YTD flows firmly into negative territory with an estimated $10.09 billion leaving the industry in 2018. Industry asset levels fell by the most since January 2016 as both performance and net flows were negative during the month.
- The influence of 2018 returns is visible in recent flow trends.
For the first eight months of 2018, large funds that had performed relatively well in 2017 had, in aggregate, seen net new money allocated. In September, we saw that figure flip for the first time, and in October the flows for that group remained negative. The implication is that in the latter part of the year we are seeing the influence of 2018 performance showing up in net flow figures, and allocations driven by prior year returns becoming less influential. From products with >$1 billion in AUM, those who have had the largest outflows in the last two months have returned an average of -1.61% YTD, while those with the largest inflows have performed much better, +2.94% YTD.
- If Q4 flows end up negative, it will be the fourth quarter of redemptions in the last five for the industry.
Given that, historically, December has seen outflows, and that October flows were negative, it is very likely that the industry will have net redemptions in the fourth quarter of 2018. If that’s the case, the industry will have seen net redemptions in four of the last five quarters. In only one year have net flows been negative in each of the year’s quarters. Contrary to expectation, that year was 2016 and not 2008.
- Macro funds faced elevated redemptions in October.
We noted in our prior report that the remainder of 2018 would be interesting for macro strategy fund flows, given the large asset-weighted performance declines the group produced in August. This has manifested itself with elevated redemptions in October, the group’s second consecutive monthly outflow and largest monthly redemptions of the year. Performance has since improved, which may be a saving grace for the strategy as investors consider redemptions into year-end.
- Equity strategy fund flows have remained positive, however investors have preferred market neutral exposures to long/short in 2018.
Long/short equity inflows were elevated in 2017, but it is not surprising given the level of volatility early in the year that investors have allocated more to market neutral strategies than their directional counterparts in 2018. Given the return of volatile returns in October and into November, these two segments will be an area to watch into year-end.
- Managed futures redemptions continue.
After three consecutive years of investors being net allocators to managed futures strategies, 2018 is on pace to be negative, and rival multi-strategy managers for largest redemptions in the industry. The issue has been persistently poor performance during volatile periods. Given large losses occurring again in October, the end of the year will likely see more redemptions for the strategy.
EM Flows Were Negative for Fifth Consecutive Month, Outflows From Europe-domiciled Managers Were Elevated
- EM fund redemptions were their highest in the last four months, but below peak outflow 2018.
The landscape for EM funds has been mixed. While the group has been showing consistent net redemptions for several months, there are managers who have been successful at raising capital even during the last two months. Some of these firms have been able to produce positive returns in otherwise difficult markets, but even products with highly negative YTD returns have been able to produce net new inflows, which is a faint, but positive nod toward EM opportunities.
- European-based managers have seen elevated redemptions recently.
Redemptions from Europe-domiciled managers have been from a mix of equity, macro and managed futures strategies. Performance for those facing redemptions has been mixed, but primarily negative for the year. Redemptions have been from among the largest managers, as those with the top 10 largest outflows in October had an average AUM of greater than $6 billion.