Investors raise hedge fund bets in December
Investors’ interest in hedge funds rose in December as they added more cash than they pulled out, though the net flows were lower than last month, data showed on Wednesday. The SS&C GlobeOp Capital Movement Index, which calculates monthly hedge fund subscriptions minus redemptions, rose 0.43 percent in December to 149.57 points. That compared with a rise of 0.67 percent in November.
Investors creep back into hedge funds
Investor interest in hedge funds came back in November, with industry AuM increasing to $3.070 billion last month, according to eVest-ment’s November 2014 Hedge Fund Asset Flows report. Some highlights from this month’s report include:
1) After two-months of outflows, investors added $5.4 billion to a variety of fund types this past month. With performance gains added in, hedge fund industry AUM increased to $3.070 trillion in November.
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2) Despite recent returns putting managed futures strategies among the industry’s best performers in 2014, investors have been slow to shift allocation decisions in managed futures strategies’ favor. Both macro and managed futures funds faced redemptions in November of $4.10 billion and $4.11 billion respectively.
3) Positive investor allocation trends, which had persisted for several months leading up to September and October’s volatility, resumed in November. Namely, flows into equity, including both long/short (up $4.54 billion) and event driven (up $2.11 billion) and multi-strategy (up $4.79 billion) led the industry.
4) The flows into equity exposure were important because they show a level of continued support for the group in the face of recent volatility. While redemptions may still emerge in the coming months, with the underlying trend in their favor, the net effect may be muted.
5) Credit strategies are going through a difficult period. Flows are mixed, with investor preferences leaning to directional strategies in the face of persistent/declining rates.
6) Interest in exposure to Asia was elevated, with Asia-focused strategies seeing inflows of $1.66 billion in November.
7) Commodity fund flows were slightly positive in November, adding $720 million. This is meaningful given the big price moves in energy and metals over the last three months and will be an interesting area to watch.
To download the full report for free, please click here.
Paul Singer finds someone else to be annoyed with
So CalPERS thinks that hedge funds are too opaque, too complex, too expensive and just not right for it? Wrong, wrong, wrong and wrong!
“We are certainly not in a position to be opining on the ‘asset class’ of hedge funds, or on any of the specific funds that were held or rejected by CalPERS, but we think the decision to abandon hedge funds altogether is off-base,” Singer wrote in a recent letter to clients of his $25.4 billion Elliott Management Corp… “It is precisely complexity that provides the opportunity for certain managers to generate different patterns of returns than those available from securities, markets and styles that are accessible to anyone and everyone,” the letter said…
“We also never understood the discussions framed around full transparency. While nobody wants to invest in a black box, Elliott (and other funds) trade positions that could be harmed by public knowledge of their size, short-term direction or even their identity.”
“We at Elliott do not understand manager selection criteria based on the level of fees rather than on the result that investors could reasonably expect after fees and expenses are taken into account,” he wrote.
Jan-Oct hedge fund inflows best since 2007
Hedge funds had a lackluster October in terms of attracting capital, bringing in only $243 million, according to new data from TrimTabs/Bar-clay Hedge, but year-to-date inflows are the best since 2007. January-October inflows totaled $94.6 billion, 91% higher than inflows from the first 10 months of 2013, according to the data provider’s estimates, which are based on information from 3,500 funds.
Eaton Vance on the benefits of absolute return strategies
The mainstream media has a lot of misconceptions about investments, but perhaps the most wildly wrong assertion is that the alternative strategies pursued by hedge funds are risky, complicated, and designed to engineer huge returns with no regard to the risks being taken – very little could be further from the truth!
Instead, alternative investment strategies are actually designed to dampen portfolio volatility, often at the expense of outsized returns in bull markets. Taken individually, alternative strategies and asset classes may be risky or volatile, but they should be reviewed within the context of a broader portfolio strategy.
Strategies that invest across asset classes, market-cap size, and geopolitical markets are collectively known as absolute return. These strategies are intended to complement core asset classes, such as stocks and bonds – not to replace them.
Eaton Vance’s Eric Stein also says absolute-return strategies can lower overall portfolio risk without sacrificing long-term return potential, thereby helping investors better navigate through turbulent times. Mr. Stein offers additional insights into absolute-return investing in the recently published interview, Is your portfolio truly diversified? from Eaton Vance’s Cornerstones of Volatility Management series.
“I think a portion of many investors’ portfolios should be allocated to absolute return strategies,” says Mr. Stein, adding that absolute return has historically had a risk/return profile similar to bonds, but from very different sources of return. “That’s where I believe these types of strategies can add value to a portfolio in the form of meaningful diversification benefits.”
Mr. Stein says the most damaging effect of volatility is that it causes investors to act emotionally and deviate from their long-term investing plans. By adding complementary alternative investments, overall portfolio volatility can be dampened, allowing investors to stay in the market during bearish times without losing their shirts. Absolute return, by contrast, will “likely lag the stock market during strong market rallies,” according to Mr. Stein, “but by helping to preserve capital in volatile markets, you may be better positioned to build wealth over the long term.”
The real risk is that investors sell at the bottom of a bear market and get back in only after the market has recovered well beyond the level at which they exited, causing irreparable damage to long-term investment objectives.
See full PDF below.