It seemed only a matter of time before investor sentiment caught up to investment performance in 2017, and that appeared to happen in June. While the industry is firmly positive for overall returns and for new flows in 2017, one can’t help but to feel the ground is not as steady as it seems.
June was the first month of 2017 where allocation and redemption decisions appeared less influenced by prior year returns, and more influenced by current year performance. While on the surface this seems positive for segments like event driven, long/short equity, and many credit managers, that comes with the assumption that investors who left these segments for other alternatives will come back. As always, time will tell us investors’ sentiment, but for now the industry again appears to be approaching a crossroads.
- Investor flows were negative in June, an estimated $7.0 billion was removed. Both Q2 and H1 2017 were ultimately positive.
- Macro fund flows turned negative in June as subpar returns finally appear to be influencing investor sentiment.
- Investors removed money from managed futures funds in June for a second consecutive month.
- Allocations outpaced redemptions to both long/short equity and event driven strategies in June.
Investors Show Signs of Discontent, Direction of Flows Shifts Again
Investor flows were negative in June 2017. Investors withdrew an estimated $6.97 billion during the month, bringing Q2 2017 flows to positive $7.54 billion, and YTD flows to $20.65 billion. Total industry AUM sits at $3.120 trillion.
- Asset gainers outpace asset losers in each month of Q2 2017.
While the direction of net flows changed each month of Q2, more than 50% of funds received net new money in each. This only happened in one month of Q1, and is one positive way to interpret June’s outflows. Redemptions were noticeably more concentrated than allocations, though, which indicates June’s redemptions are a result of elevated outflows from a limited number of products.
- Recent losses appear to weigh on investor sentiment toward macro funds.
Macro hedge funds had positive net flows in each of the first five months of 2017. Good relative returns from many larger macro funds in 2016, along with a landscape ripe with geopolitical tensions and perceived stretched equity market valuations drew investors into the strategy. Through H1 2017, however, returns from the universe have lagged most other strategies, and the largest managers have underperformed their peers. Five of the six largest asset losers in the strategy in June had negative H1 returns, which averaged nearly -6%.
- After turning negative in May, sentiment toward managed futures remained negative in June.
Managed futures fund performance has clearly been disappointing. After underperforming all other major strategies in 2016, including macro funds, the group has again fallen behind in 2017, and investors are evidently reacting by removing assets for a second consecutive month.
- Event driven funds see a shift to positive flows.
Event driven fund flows had been highly negative after the strategy produced some elevated losses from mid-2014 through early 2016. Since then, returns for many had stabilized, and the ten largest reporting event driven managers have been among the industry’s best performing, outside of emerging markets. But investors have appeared wary of returning, and flows had been mostly negative through 2015 and 2016. While flows have been negative thus far in 2017, June marked the largest allocations to event driven funds in six months, and second largest monthly allocation in nearly two years.
- Allocations to commodity strategies beginning to stall.
In our prior report, we noted it was surprising that allocations to commodity funds continued to outpace redemptions in the face of persistent negative returns. We are not surprised now that in June flows turned negative. Redemptions were not large, and many funds are still able to raise capital, and also produce decent returns, but the environment is becoming difficult for commodity strategies.
- Long/short equity funds gained assets for second consecutive month.
Long/short equity funds have faced a similar theme as event driven managers in recent years. Periods between 2014-2016 produced elevated losses, and as a result investors began taking money out in earnest in mid-2016. With returns somewhat stabilizing, and poor returns from the macro and managed futures space, the universe has become more attractive, receiving net inflows in each of the last two months. Within the universe, however, there are a few quantitative strategies that have been a driver of recent inflows. It is too early to say the universe as a whole has become favorable again to investors, but it must appear to be relative to some industry peers.
Final Strategy Thoughts:
It seemed only a matter of time before investor sentiment caught up to investment performance in 2017, and that appeared to happen in June. While the industry is firmly positive for new flows in 2017, one can’t help but to feel the ground is not as steady as it seems. June was the first month of 2017 where allocation and redemption decisions appeared less influenced by prior year returns and more influenced by current year performance. While on the surface this seems positive for segments like event driven, long/short equity, and many credit managers, that comes with the assumption that investors who left these segments for other alternatives will come back. Who’s to say an investor who had shifted allocations from long/short equity to macro would come back the other way, instead of moving to private markets, passive exposure, or some other asset class? As always, time will tell, but for now the industry is again at a crossroads, which again has been paved by its own doing.
There finally appears to be some enthusiasm toward emerging markets exposure, though not widespread
- Updated May data, along with June flows indicate some interest appearing for EM strategies, focused on credit.
The six consecutive months of very strong relative returns from EM strategies compared to their developed markets peers appears to have drawn some interest from investors. Revised data from May, and data from June indicate two consecutive months of strong inflows, which hasn’t happened since mid-2016, and then since mid-2015. The largest allocations in June went to emerging market credit strategies.
- Interest mixed on China, and other regionally focused EM equity strategies.
While the primary drivers of EM inflows in June were credit strategies, the primary drivers of EM outflows in June were country-specific EM equity funds. The indications of interest in China-focused strategies we saw in May, mostly disappeared in June, though there were products able to gain new assets. Investors redeemed from Eastern European-focused funds, and from Brazil/LatAm strategies.
Article by eVestment