The continued interest in macro strategies is evidence that investors are using the industry not just for its increasing prevalence of quantitative strategies, but for expertise on how to navigate, and preferably to benefit, in a global environment increasingly influenced by major geopolitical themes.

Additionally, the industry appears to still be feeling the weight of its segmented underperformance. Evidence that cost must provide results is rampant, though it is also possible that what had been a broadly positive environment in the equity space has made the value of many hedge fund managers opaque. This is not an industry-wide issue, however it is driving the mounting evidence of asset consolidation.

Q1 2017 Letters

Highlights

  • Investors flows were near flat in April. An estimated $930 million was removed, and YTD flows remain positive.
  • Macro funds continue to be investor favorites in 2017.
  • Investor sentiment toward managed futures products shifted negative April.
  • Segmented declines in 2016 are weighing on long/short equity aggregate fund flows.
  • Evidence of asset consolidation continues to grow within reported data.

After Positive Q1, Investors Pause on Hedge Fund Allocations

Investor flow was slightly net negative in April. Investors withdrew $930 million during the month, bringing YTD flows to $12.18 billion. Total industry AUM sits at $3.107 trillion.

2016

Hedge Fund Allocations

Key Points

  • A low proportion of funds received new money in April, YTD flows indicate consolidation.
    In the positive flow environment of Q1 2017, over half reporting managers had net inflows. For reference, in 2016, the average monthly proportion of those receiving new money was 46%. In April, only 43% of reporting managers saw new money come in. Additionally, despite the positive flows in 2017, all major strategies have fewer than 50% of funds with inflows YTD.
  • Flows among large funds were generally muted.
    Among funds with greater than $1b in AUM, a very low proportion saw inflows >5% of AUM (3.8% in April vs. average of 6.5% in Q1 2017, and 6.7% since January 2016) . Evidence of elevated redemptions was similarly minimal, 7.6%, which was well below the last 16 month average of 10.0%.
  • Despite the weak allocation environment in April, demand for macro funds continued.
    Macro hedge fund allocations are leading the hedge fund industry in 2017. Investors have allocated $11.6 billion into the universe through April. Despite the positive sentiment, just over half of macro managers had net redemptions in April, and just over half have had net redemptions YTD 2017.
  • Investors appear on edge about managed futures allocations.
    Elevated allocations to managed futures occurred in March even after elevated performance losses in four of the last five months of 2016, and losses bookending Q1 2017. That sentiment shifted in April, or at least inflows stalled as redemptions remained. 65% of reporting managed futures managers had redemptions in April, while 55% have YTD outflows.
  • 2016 returns are a big influence on 2017 long/short equity fund flows.
    Investors in the long/short equity space are shedding smaller funds which under-performed in 2016, removing an estimated $9.2 billion from that segment through April. For those who performed well last year, particularly larger funds, the asset raising environment appears very positive. The 10 LSEq funds with the largest allocations in 2017 returned an average of 14.8% in 2016, and have an average AUM of $4.7 billion. The 10 with the largest redemptions in 2017 returned an average of -0.3% in 2016, and have an average AUM now of $2.6 billion.
  • Multi-strategy funds continue to feel pressure from investors.
    For almost a year, multi-strategy funds have felt the weight of negative investor sentiment. Certain large players in the space have been under more pressure than their peers, however still more than half (55%) of managers have seen investors remove assets in 2017. This universe had been a beacon of the industry’s strength from 2013-2015, but elevated losses from key players in late 2015 and early 2016 impacted investor confidence.
  • Fixed income/credit managers are seeing renewed interest.
    While flows haven’t been huge, fixed income/credit managers are seeing a return of positive investor sentiment to their strategies. From mid-2014 through the first half of 2016, this universe produced somewhat out-of-character performance losses. Investors took notice, and beginning in June 2015 a stretch of near consistent outflows lasted until the end of 2016. In the meantime, all the universe has done is to produce consistent returns in 12 of the last 13 months. As a result, investors appear to be returning to the segment.
  • Inflows to commodity strategies seized up in April as redemptions swelled.
    After 19 months of mostly positive flows for commodity funds, recent performance losses may be weighing on investor sentiment, and outlooks. As one of the only segments with more than half of funds receiving new money in 2017, the fact that nearly 70% had redemptions in April indicates a sudden shift in sentiment.

Final Strategy Thoughts:

The continued interest in macro strategies is evidence that investors are using the industry not just for its increasing prevalence of quantitative strategies, but for expertise on how to navigate, and preferably to benefit, in a global environment increasingly influenced by major geopolitical themes. Additionally, the industry appears to still be feeling the weight of its segmented underperformance. Evidence that cost must provide results is rampant, though it is also possible that what had been a broadly positive environment in the equity space has made the value of many hedge fund managers opaque. This is not an industry-wide issue, however it is driving the mounting evidence of asset consolidation we’re seeing.

Investors Remain Tentative on Emerging Market Exposure

Hedge Fund Allocations

Key Points

  • Emerging market flows were negative in Q1, and remained negative in April.
    After an apparent shift toward positive sentiment to end 2016, a second consecutive low/negative monthly rate of flow indicates investors appear happy to sit on the sidelines for now.
  • China remains a story of targeted allocations amid broad redemptions.
    Flows for China-focused funds were positive in April, however removing one product which received elevated interest would shift the totals to negative for the month. For the year, the proportion of managers with outflows is similar to that of the overall industry, however there is a greater tendency for elevated redemptions which has resulted in reporting managers losing an estimated $260 million in assets YTD.
  • Redemption pressures on European domiciled funds cooled in March, turn positive in April.
    After ten consecutive months of redemption pressures on the European hedge fund industry, inflows finally outpaced outflows in March, and remained positive in April. Interest appears broad on a strategy basis, with allocations to Europe-based long/short equity, credit, macro and managed futures products. Redemptions absolutely still exist, and are more concentrated in the managed futures space.

Article by eVestment