December’s Seasonal Redemption Pressure Cut 2015 Hedge Funds Inflows By 36% by eVestment
Multi-strategy, equity, managed futures and commodities were the lone aggregate asset gainers of 2015
Total hedge fund assets fell $58.2 billion in December 2015, a decline of 1.9%. Investor flows were negative during the month with an estimated net $24.6 billion redeemed. Performance accounted for an additional $33.7 billion decrease. The combination of performance and net investor outflows reduced total industry assets to $3.027 trillion. Investors added an estimated $44.6 billion into hedge funds in 2015.
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The hedge fund industry’s large redemptions in December 2015 should not be viewed solely in the context of recently publicized pockets of negativity. In each of the last five years, December has been a month where redemptions far outpaced new allocations. The average December net flow over the last five years has been negative $18.2 billion. Net flows were negative $23.1 billion in December 2014, a year in which the industry had its largest postcrisis inflows ($88.3 billion). This year-end redemption pressure has shown to be a normal part of the investment cycle. Another historical norm has been for new allocations to far outpace redemptions early in the year. In each of the past four ensuing Februarys (the ensuing February to 2015 not yet occurring), new allocations outpaced redemptions by an average of $26.1 billion.
Hedge funds closure are not new in the industry
Elevated fund closures are also not new within the industry. The hedge fund industry is predominantly made up of a large number of small businesses in a high operating-cost environment. Liquidations will be elevated when operating costs outweigh expected revenue and new fund launches will be elevated when financial markets provide opportunities for the opposite scenario. Fund closures were last elevated in 2011 and investors have since allocated $219 billion into the hedge fund industry.
Every major strategy and market exposure, with one exception, felt the weight of December’s seasonal redemption pressure. The one exception were commodity-focused strategies. In the midst of their worst performance year on record (-10.8%), commodity hedge funds have begun to feel investor sentiment shift in their favor. Since mid-2011 through May 2015, investors had persistently been redeeming assets from the universe, but in the last seven months ending in December, allocations have been positive in all but one. The inflows of $1.8 billion in this stretch are an indication investors see opportunity in the commodity space.
Multi-strategy hedge funds see yet another month of outflows
Multi-strategy hedge funds had only their third monthly net outflow in the last thirty months in December (December 2014 being the largest redemption month in this span). Outflows were slight, $1.13 billion, and the universe ended 2015 receiving more assets than all other hedge fund strategies combined. With multi-strategy products removed, industry net flow was negative $10.86 billion in 2015.
Managed futures funds’ December redemptions followed elevated outflows in November as volatile returns since April appear to have impacted investor confidence. December’s $1.24 billion net outflow brings 2015 flows to positive $13.11 billion, the universe’s first annual aggregate net inflow since 2011.
Macro funds have received an over-weighted portion of recent negative publicity surrounding high-profile fund losses and/or closures. December’s redemptions of $6.6 billion were beyond the seasonal norm (average December net outflow of $3.0 billion in the last four years) and are in part a reaction to large losses in June and August. The universe may continue to see redemption pressures into 2016 as elevated losses persisted in December.
Largest outflows from the event driven funds
Event driven funds had the largest outflows of any strategy in 2015, including elevated redemptions in December. The universe has a more varied flow history than many other major strategies. The group’s net flows were positive in both 2008 and 2009, aided by launches of new products targeted at a unique set of circumstances and opportunities in the wake of the financial crisis. It may be that investor preferences have shifted toward private equity-like structures for event driven investing, designed for longer-term value realization scenarios.
Investor sentiment toward credit hedge funds was negative in December for the sixth month in the last seven. Redemptions of $6.11 billion were not the largest of the year (July $7.89 billion, October $9.99 billion), but they did put an exclamation point on the universe’s first aggregate outflow since 2009.
Emerging market hedge fund flows were not as negative as the rest of the industry’s major universes in December. One major difference in December, however, was the appearance of redemptions from China-focused products. Flows were not overwhelmingly negative within the universe, but redemptions did outpace allocations for only the second time in 2015 and were larger than the prior monthly outflow in September.