Hedge Funds: Redemption Pressures Continued into 2016, Assets Fall Below $3T by eVestment
2015 performance weighed heavily on January flows, event driven funds hit hardest, commodity interest continues
Total hedge fund assets fell $64.7 billion to start 2016, a decline of 2.1%, which dropped total industry assets below the $3 trillion level for the first time since the industry first surpassed the milestone in May 2014.
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Investor flows were negative in January with an estimated net $21.5 billion redeemed. Performance accounted for an additional $43.2 billion decrease. The combination of performance and net investor outflows reduced total industry assets to $2.964 trillion. Flows have been weak or negative in all except one January since 2008 as investor redemptions from the prior year carry over before new assets are allocated en masse. February has historically been the barometer month for the year’s flows.
Hedge funds see largest investor redemptions in January
January’s redemptions of $21.5 billion were the largest in the opening month for the industry since January 2009 and reflect dissatisfaction with losses in 2015. Investors redeemed a significant amount in January from funds which posted losses in 2015, $24.8 billion. Both large and small funds that underperformed faced redemption pressures. Among products posting positive returns in 2015, on an aggregate basis, January flows were only positive to the large, best performers (>$1 billion, >5%).
Event driven fund flows were highly negative in 2015, particularly toward the end of the year. This redemption pressure continued into January 2016 and it’s clear that performance weighed heavily on investors’ decisions to part ways. Products with negative returns in 2015 accounted for the vast majority of January’s redemption pressures, while funds that returned greater than 5% in 2015 actually saw positive investor interest to begin 2016.
There were similar themes in the long/short equity universe in January. At the aggregate level, the group experienced elevated redemptions in January and flows were most negative for funds that lost money in 2016. Additionally, there were preferences evident toward larger funds, providing returns were positive. Large funds that produced returns in the 0-5% and >5% range had aggregate inflows in January, but smaller funds (<$1 billion) in each positive performance bracket experienced aggregate outflows.
Macro fund flows were essentially flat to begin 2016. Investors again appeared to favor those able to perform well in 2015, along with a preference toward larger funds, providing performance was not negative. Large macro funds with performance declines in 2015 saw $2.3 billion removed in January. Macro fund flows were positive for much of 2015 until volatile markets in H2 produced pockets of elevated losses, bringing redemption pressures which appear to have persisted into the new year. The good news for macro managers is that negative sentiment appears to be performance-centric and not strategy specific.
Multi-strategy hedge funds flow slightly negative
Multi-strategy fund flows were slightly negative in January, with less than $1 billion removed to begin the year. January’s slight outflows followed another slight outflow in December, causing the universes first two-month redemption span since September 2012.
Managed futures fund flows were negative for the third consecutive month in January, albeit only slightly. Interestingly, funds which performed well in 2015, even large funds, faced redemption pressures in January. The likely reason for this was the increased volatility of returns, which began in April 2015. The universe produced relatively good returns to start 2016, so it will be interesting to see how investor sentiment manifests in February.
Investor interest in commodity strategies has increased for the fifth consecutive month. January’s inflows of $1.2 billion were the largest for the universe since mid-2014. The shift to positive sentiment for commodity hedge funds appeared to have begun in June 2015 and has persisted. This is a major reversal of a trend which dates back to mid-2012. Hedge fund investors appear to firmly believe there are significant opportunities in the commodity space.
Investor flows for emerging markets were slightly positive in January. Investors showed a preference for emerging market debt exposure entering the year, however there were pockets of allocations into funds focused on China, both in equity and debt markets.
Overall flows for funds investing in China were positive in January as funds reporting to eVestment had slight aggregate inflows of $41.8 million. There appeared no defining characteristic impacting flows as funds both big and small, with good yet very volatile 2015 returns either received new money or had net redemptions in January. The implication is that flows are the result of fund-specific investor concerns, rather than any aggregate satisfaction or dissatisfaction with the opportunity set in China.