Institutional Investors

Net Flows Flat To Start 2019, Diversity Of Strategies Preferred

All things considered (and there was much to be considered following a difficult 2018) the start to 2019 was not great, but nowhere near as bad as might have been expected.

Q4 hedge fund letters, conference, scoops etc

Institutional Investors

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European managers (U.K. specifically) faced the brunt of redemption pressures to begin the year, and slightly more than half of all reporting funds globally had outflows, but the level of redemptions, and the strategy composition of outflows was almost encouraging for the industry.

In the prior ten years, January has typically been a light month for flows, the exceptions being large redemptions following the financial crisis and the mediocre performance year of 2015.

The fact that segments like multi-strategy were strongly positive in January, however, is a good sign. While macro fund flows were negative, there were still many funds able to gain new assets.

Expectations are not high for new allocations to be broadly spread around the industry in 2019, but given the level of pessimism to end 2018, the start to the new year could have felt much worse than it did.

Highlights

  • Investors removed an estimated $1.66 billion from hedge funds in January, but assets rose as performance outpaced outflows.
  • Allocations to multi-strategy funds to begin 2019 reversed a concerning H2 2018 trend for the group.
  • Redemption pressures persisted for long/short equity managers.
  • Macro and managed futures strategies both experienced light outflows to begin 2019, but the characteristics of flows between the two were not similar.

Net Flows Flat to Start 2019, Diversity of Strategies Preferred

Investors removed an estimated $1.66 billion from hedge funds to start 2019. Performance more than offset redemptions, lifting total industry assets to $3.214 trillion, ending a four month string of declining industry AUM.

As far as January’s go, January 2019 was not great, but not bad.

In the months of January from 2010 to 2018, investors have removed a total of $3.16 billion on a net basis from the industry. Over nine years, the total net flow in January is nearly flat. This should put the January net outflow level of 2019 in perspective, meaning it is worse than average, but not too bad.

In the last five years including 2019, flows in January have been negative four times, the largest being the nearly $20 billion removed in 2016 following the prior year’s mediocre returns. That January 2019 flows were nowhere near that level, despite the largest losses since 2011, is a ray of hope.

Multi-strategy managers saw a reversal of sentiment to begin 2019.

Redemptions late in 2018 from multi-strategy managers were concerning. The prototypical multi-strategy fund embodies the overall industry’s return profile, or more favorably stated, the best possible version of it. If investors had turned their back on multi-strategy products, as elevated redemptions in H2 2018 began to indicate, that it is a negative signal toward the industry as a whole.

It will be intriguing to see if strong inflows for multi-strategy funds to begin 2019 signal a broader level of interest for the industry as the year progresses.

Net Flows

Despite rebounding returns, investors continued to remove assets from long/short equity.

Sentiment toward long/short equity managers turned negative shortly after elevated losses in February 2018. In the eleven months since, redemptions have outpaced new allocations nine times, accelerating into the end of last year.

Unlike the nod to multi-strategy managers to begin the year, investor redemptions from long/short equity persisted into 2019, likely a sign of dissatisfaction with how aligned performance from many within the group were to 2018’s broad market losses. Flows by fund size and 2018 performance appear to confirm this notion.

Both macro and managed futures saw light redemptions to begin 2019.

While flows were similar to begin the year, the similarities between the two stopped there. Within managed futures, there was a preference to allocate to those able to outperform last year, while those who underperformed faced redemptions.

For macro strategies, the preferences driving flows were less clear, which could be a sign of effective product marketing and communication, or simply investor specific needs and preferences driving flows.

Commodity strategies see interest in January, but the interest is not broad.

About 40% of reporting commodity managers appeared to have net inflows to begin 2019, but those receiving new allocations saw enough interest for the group’s flows to be meaningfully positive.

Allocations were made to products which performed well last year, and to those who did not perform well. Despite the narrowness of allocations, there’s clearly interest in the segment to begin 2019.

Net Flows

Net Flows

U.S.-Based Firms See Inflows While Assets Depart European Funds

Marquee large funds were a driver of net inflows for US-based managers.

Inflows for U.S.-based funds compared to redemptions from Europe-based managers to begin 2019 were primarily due to allocations into large multi-strategy and quant equity products in the U.S., and redemptions from managed futures and non-quant equity-focused funds based in Europe, specifically in the U.K.

It is unclear from our perspective whether developments around BREXIT have anything to do with U.K.-based fund redemptions, however 2018 returns from those losing the largest amount of assets averaged less than -4%.

Despite net inflows, the environment for EM managers was difficult to begin 2019.

More than 60% of reporting EM managers appeared to face redemption pressures to start 2019. The bulk of net inflows were to a small, but diverse set of products.

There was clear interest in EM credit exposure, both diversified and to China specifically, and to market neutral global EM equity.

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Hedge Fund Performance Tables

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Article by eVestment

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