Hedge Funds February & YTD 2016 Flows Reflect Dissatisfaction With 2015 Returns by eVestment

Macro and event driven fund redemptions weigh on industry, investors continue to add to commodity funds

Total hedge fund assets fell for the third consecutive month in February. The asset decline of $20.1 billion further reduced industry AUM below the $3 trillion mark, a level the industry first surpassed in May 2014, then peaked a year later in May 2015 at $3.168 trillion, before dipping back below the mark in January 2016.

Hedge Funds Asset Flow

Investor flows were positive in February with an estimated net $4.4 billion added. Performance accounted for a decline of $24.5 billion. The combination of performance declines and net investor inflows reduced total industry assets to $2.946 trillion.

Investors added $22.6 billion of net new capital into hedge funds in February

February has historically been a month of elevated inflows for the industry. Over the prior six Februaries, from 2010-2015, investors added an average of $22.6 billion of net new capital into hedge funds. February 2016 inflows of $4.4 billion were well below this average and well below the low of that six year period, which was $12.1 billion in February 2010.

Hedge Funds Asset Flow

2015 performance heavily influenced investor flows in early 2016. In February, both large and small managers able to post positive returns in 2015 have seen investor sentiment in 2016. In the first two months of the year, hedge funds that posted gains of 5% or better in 2015 have received nearly $14 billion in allocations, while those with negative returns in 2015 have had $28 billion redeemed.

Commodity strategies continued to receive new capital inflows in February. February’s inflow of $1.8 billion was the largest in the current streak of six consecutive months of positive investor sentiment. The current positive trend spans farther back to include eighth of the last nine months. This is the longest streak of inflows for the commodities sector since a six month string ended in May 2011. Flows had been persistently negative since May 2012 until sentiment shifted in June 2015. Commodity funds have taken in $4.7 billion since last June.

Hedge Funds Asset Flow

Another shift in sentiment may have emerged in February in the fixed income/credit space. Flows in this space had been negative in the prior five consecutive months and in seven of the last eight months. In that span, investors have redeemed $42.2 billion which has impacted funds within the event driven, distressed and credit trading universes. The inflow of $2.5 billion in February was primarily into larger firms, but included a mix of products that performed well relative to their peers, but also had difficulties in the last year. It is possible that inflows into the credit space are a signal that investors believe the majority of damage has been done and opportunities in segments such as the energy complex and in the European banking sector are increasingly attractive.

Managed futures hedge funds see a positive investor interest

Managed futures funds saw a return of positive investor interest in February, halting three consecutive months of redemptions. Allocations in February went primarily to 2015’s top performers. For the year, size has shown to be nearly as attractive in the managed futures space as returns. Funds managing greater than $1 billion that declined in 2015 have received $1.3 billion in net new assets, while smaller managers posting losses have seen redemptions of $1.5 billion.

Hedge Funds Asset Flow

Large, underperforming macro funds weighed most heavily on February’s overall flows. Big macro funds lost a net $2.4 billion of investor assets in February, accounting for the majority of the strategy’s $2.8 billion of redemptions. Even large funds which performed well in 2015 lost assets in February.

2015 performance appears to have had the greatest impact on long/short equity funds. Large LSEq managers which lost money in 2015 faced redemptions of $1.5 billion in February bringing their YTD asset outflows to $6.2 billion, the largest of any specific size/performance universe, and ahead of macro funds of the same ilk.

Hedge Funds Asset Flow

Emerging market hedge funds slightly positive

Emerging market hedge fund flows were very slightly positive in February. The EM universe had seen redemptions in seven of the prior eight months during which $4.2 billion was removed. Negative sentiment has persisted in the EM universe since July 2014. The largest influence on EM flows have been smaller, negative performers from 2015, which have lost an estimated $1.3 billion due to redemptions in 2016.

After receiving net aggregate inflows of $41.8 million in January, investor interest in China-focused funds cooled in February with an estimated $9.1 million removed from managers reporting thus far. Similar to January, there appears to be little distinguishing factors influencing flows. Several firms with elevated redemptions in January saw new inflows in February and vice versa.

Hedge Funds Asset Flow

Funds domiciled in Asia faced net investor redemptions in February and YTD 2016. Redemptions appear to be highest from smaller products, particularly from those which lost money in 2015.  Managers of large funds domiciled in Asia have had more success retaining assets amid mediocre performance. However, their advantage has not been quite as clear when performance is good.

Hedge Funds Asset Flow