Dissatisfaction With Returns Evident Across Hedge Funds by eVestment
- Investors removed $20.70 billion from hedge funds in June, one of the largest non year-end outflows since prior crisis periods of 2011 and 2009.
- Investors added $3.32 billion into commodity funds in Q2 as positive sentiment entered its 10th consecutive month.
- Elevated redemption pressure evident within managed futures funds in June.
- Macro fund investors whipsawed as 2016 allocations met with losses and forsaken funds rebound.
The hedge fund industry suffered large redemptions in June 2016. As a result, Q2 flows were negative for the third consecutive quarter, and H1 flows were negative for only the second time on record.
While there are exceptions, investors are clearly dissatisfied not only with 2015 returns, but also with performance from portions of the industry in 2016. The result of the BREXIT vote, and its impact on returns across the industry, has likely not been factored into investor flows to this point given redemption requests typically require at least a month’s notice.
Outflows were highest among equity-focused strategies, including long/short and event driven funds. Commodity funds continue to attract new assets, making the segment a much needed highlight for the industry.
Dissatisfaction with Returns Evident Across Industry
Investors redeemed a net $20.70 billion from hedge funds June, bringing Q2 net flows to negative $10.68 billion and H1 2016 net flows to negative $27.95 billion.
With some exceptions, this was not a good month, quarter, nor first half for the industry. June redemptions were the largest June since eVestment began tracking monthly flows in 2009. Q2 outflows were not near historic, but were the industry’s third straight quarter of redemptions, which hasn’t occurred since Q2 2009 (last of four quarters of redemptions). H1 2016 was the only other negative H1 on record next to H1 2009.
- What made redemptions from the industry in June different than all other months of 2016 was that it was the first month of 2016 when large funds that performed well in 2015 had aggregate redemptions. This is an indication that as redemption pressures from poor 2015 performance appeared to abate in April and May, negative sentiment related to 2016 performance may be rising.
- Given that redemption notices tend to be a minimum of one month (shorter for macro/managed futures, longer for event driven), it is unlikely the industry’s June/Q2/H1 flows were materially impacted by the recent BREXIT vote.
- Long/short equity strategies had the largest aggregate redemptions in June. Performance declines in H1 are likely the primary reason for the elevated outflows. The ten long/short equity funds with the largest outflows in June returned an average of -6.13% in Q1, and -8.27% YTD. Conversely, the ten funds with the largest inflows in June returned an average of +4.55% in 2016.
- Multi-strategy hedge funds, which tend to have redemption notice requirements of 45 days or more, had their largest monthly outflows since December 2014 and second largest since December 2012. Worth noting, both prior larger monthly redemptions occurred at year-end dates. For a non-year end level of outflow to exceed June, we have to go back to the heart of the European sovereign crisis in April 2012.
- The darlings of the post-BREXIT market volatility, managed futures hedge funds, faced mixed flows in June. The slight net inflow of $410 million includes some large fund-specific redemptions, which is not surprising after three consecutive months of aggregate performance losses.
- Investor interest in managed futures strategies is at a crossroads; the group had the largest inflows in H1 2016 and second largest in 2015, the three-month pre- BREXIT string of losses put an exclamation point on a volatile last twelve months of returns, but then they outperformed all other strategies by far in the wake of the BREXIT “Yes” vote. Investors have to weigh performance consistency, against the desire for less correlated strategies. For now, flows are reacting to negative returns, but the coming months will show which is more important to investors.
- Commodity fund flows were positive again in June, the ninth month of inflows in the last ten. Performance for the universe was strong in June, which should keep investor sentiment positive. Commodity funds are one of the few bright spots for the industry in 2016.
- Credit hedge fund flows were generally negative in June and Q2, despite a recent string of strong relative returns. It has been the abundance of opportunities in post-crisis environments that has historically brought large investor commitments into credit strategies. The recent good returns have been more so about either concentrated events, or the realization of targeted opportunities like those in energy credits. While investors have likely been pleased with recent returns, the somewhat indifferent-seeming recent flows reflect an anticipated dearth of widespread opportunities.
- Aggregate macro hedge fund flows shifted back to negative again in June after a two-month reprieve. Money continues to be removed from large funds which lost money in 2015.
- Unfortunately for macro investors, and ultimately for the macro universe, of larger funds (>$500mm) reporting through June, the ten best performers of 2016 have seen investors remove over $7 billion during the year, and the 10 worst performers have received allocations of nearly $4.5 billion.
- Event driven funds continue to see assets removed. Net outflows of $2.97 billion in June result in $6.73 billion removed in Q2 and $27.06 billion removed in 2016. The largest redemptions during the year have been from big funds that underperformed last year. However, similar to the point above regarding poorly timed redemptions from macro managers, there has been a lot of money removed from funds that produced decent returns in H1 2016.
Redemptions Pan-Regional, Impact Worse on Asia and Europe
Redemptions from funds operating in Asia and Europe had a larger relative impact on their regional industries than redemptions from US-domiciled operations in June, though all experienced elevated outflows. For the year, Asia’s industry has been hit hardest.
Regional Flows Overview
- For the second consecutive month, funds domiciled in Europe experienced elevated redemption pressure. Also for the second consecutive month, the majority of redemptions came from firms located in the UK and from within long/short equity, and large managed futures funds.
- Money continued to come out of funds investing in China in June. The $126.5 million removed from reporting funds was below the level seen in May, which was in turn far less than the level from March. While it appears the heaviest redemption pressures may have passed, investor sentiment continues to be negative.
- The Asia-domiciled fund industry is in the midst of its worst redemption pressures since mid-2011. Investor flows have been negative for seven consecutive months, and for nine of the last ten months. In this span, investors have removed an estimated $6.1 billion, the equivalent of a 10% decline in the region’s business due to investor redemptions.
- While aggregate emerging market fund flows were negative in June/Q2/H1, there have been bright spots, including products focused on EM currencies, as well as signs of investor interest in Russia