2014 Best Year For Hedge Funds Since '07, But Year-End Redemptions Push Q4 Flows NegativeVW Staff
According to eVestment, redemptions hit previously favored strategies, managed futures see first inflow in 16 months.
Total hedge fund assets fell 0.61% in December to end 2014 with total assets of $3.041 trillion. Redemptions were elevated during the month, a trend which has persisted in December of each of the last four years and is likely a seasonal factor, rather than one of overwhelmingly negative investor sentiment towards the industry.
Hedge funds' redemptions push Q4 flows to negative
Investors withdrew $13.2 billion from hedge funds in December. The redemptions were enough to push Q4 flows to negative $8.4 billion, the industry’s first quarterly decline in six quarters and its largest outflow since Q4 2012. Despite December’s outflow, 2014’s total inflow of $98.2 billion was the industry’s largest since 2007. The industry received inflows of $61.7 billion in 2013 and $24.9 billion in 2012.
There was a big question as to how long it would take, or if it would happen at all, for managed futures strategies to see a positive reaction from investors following their recent string of solid returns, which pushed them to lead the industry in 2014. After fifteen consecutive months of investor redemptions, the universe received net inflows of $1.0 billion in December. Allocations were spread across a variety of fund sizes during the month, but good performance was a constant. The top 10 managed futures strategies for inflows in December returned an average of 12.3% in H2 2014.
Withdrawals from credit strategies
Investors pulled more money from credit strategies in December than in any month over the last three years, $4.9 billion. The withdrawals come at the end of a good year for capital raising, an inflow of $31.3 billion, albeit well below the universe’s 2013 inflow of $68.7 billion. The string of poor returns over the last five months of the year, resulting in the group’s worst aggregate returns since the financial crisis, likely weighed on investor sentiment. The five credit funds with the largest redemptions in December had an average return of -6.1% in the second half of 2014.
There were segments of credit strategies which avoided negative investor sentiment at year-end. Both distressed and MBS-focused funds continued to see net inflows to end the year. For the year, the strategies received $9.3 billion and $6.5 billion, respectively.
Event driven funds experienced relatively light redemption pressure in December, a good sign for investor sentiment towards the strategy. Activist fund flows were small in December, but positive with a slight $380 million added. The inflow brings 2014 allocations to activists to $14.4 billion and total activist AUM tracked by eVestment to $91.5 billion.
Multi-strategy and long/short equity funds receive most investor interest
The two segments receiving the most investor interest in the first half of 2014 also had the largest redemptions in December. Multi-strategy and long/short equity funds lost $4.1 billion and $3.2 billion in December, but full year inflows for each surpassed 2013.
2014 was an interesting year for hedge fund flows with virtually all of the year’s inflows coming in the first six months. Whether that is due to seasonal allocation preferences by institutional investors, or a negative reaction to performance in the face of global volatility, is still unknown. What we have seen in each of the last three years has been redemptions into year-end, followed by large allocations in the first quarter of the new year. This is likely a redistribution of the prior year’s redemptions along with new money coming in. If we do not see that trend persist into 2015, then it could be a sign of a shift of sentiment towards the industry as a whole, however that is contrary to our expectations for 2015.