Hedge Funds: Redemption Pressures Continued Into April by eVestment
The hedge fund industry’s assets continue to sit just below the $3 trillion milestone, at $2.986 trillion. Stagnant growth in April was due to continued redemption pressures offsetting any meaningful performance related asset gains.
Q2 Letter: Baupost won big in Q2 with PG&E, eBay, Liberty Global
Seth Klarman's Baupost recorded "strong" gains for the second quarter, although precise numbers were not included in the July 23 letter to investors, which was reviewed by ValueWalk. Klarman said that during the first quarter, they were "substantial purchasers of securities," while during the second, they were "significant net sellers" due to the strong rally. Read More
In April, commodity strategies remained in favor and macro fund redemption pressures abated as investors revisit the universe’s better performing products. Managed futures continue to be among investor’s favorites, while multi-strategy funds showed weakness after a string of recent losses. Redemptions from credit strategies, the industry’s post-financial crisis darlings, weighed most heavily on overall flows.
- Investors removed $1.9 billion from hedge funds in April, the sixth month in the last eight the industry has faced net outflows.
- Allocations to commodity strategies continued. The universe is in the midst of an unprecedented string of positive investor sentiment.
- After spiking in March, redemptions from China-focused funds continued into April.
- Multi-strategy funds were hit with redemptions for the second time in 2016.
Hedge Funds: Redemption Pressures Continued into April
Investors redeemed an estimated net $1.89 billion from hedge funds in April, the sixth month in the last eight in which redemptions outpaced allocations. Performance gains during the month were minimal, but helped industry assets increase $6.86 billion to $2.986 trillion.
Commodity strategies remain in favor, macro fund redemption pressures abated, multi-strategy funds showed weakness, and prior losses in credit strategies weighed most heavily on overall flows.
- The current wave of investor dissatisfaction is similar to what the industry experienced in late-2011 in the aftermath of losses from the first wave of the European sovereign crisis, both in terms of frequency and scale. Net outflow of $47 billion in H2 2011 was 1.8% of industry assets at the time; the current negative trend has caused $55.2 billion in redemptions, also accounting for 1.8% of AUM.
- The current negative investor sentiment still appears driven by performance, rather than a general disdain for the industry. For the fourth consecutive month, investors withdrew money from funds which underperformed in 2015 and allocated to funds which performed well in 2015.
- The trend above was most clear among macro strategies in April. The group received a net $2.7 billion, stopping a five-month string of redemptions. A large amount was redeemed from poor-2015 performers and a large amount went to good-2015 performers, with the vast majority of asset movement occurring within large products.
- Managed futures funds received $2.9 billion in April, the third consecutive positive month. In this universe, performance has had less of an impact than size. In 2016, $6.2 billion has been added to large funds that were negative in 2015 and $7.5 billion added to large funds that were positive. Net flows among smaller managers have been flat in aggregate, with positive returners benefiting and loss-producers losing assets.
- Multi-strategy fund flows were negative in April: the group lost $1.1 billion due to redemptions. April was the second month of outflows in 2016 and follows a string of performance losses. Virtually all of the recent redemption pressure has been on funds which declined in 2015.
- Interest in commodity funds was positive again in April. Investors added $1.0 billion during the month, and a total of $6.4 billion in the current eleven monthlong wave of positive investor sentiment.
- From 2010-2014, investors allocated more to credit funds than any other market or strategy in the industry ($230 billion). From Jan 09 – Jul 14, credit markets provided hedge funds the greatest returns of any market segment (~113%). Since then, only commodity strategies have produced more down months (15 vs. 17, respectively). Since December 2014, credit funds have had $47.1 billion redeemed, including outflows in nine of the last eleven months. The universe posted large gain in each of the last two months, an indication of opportunities being realized. It will be of interest to note if investors return to credit funds in the coming months.
Hedge Funds: Redemptions from China Funds Continue
Negative sentiment toward emerging market exposure has persisted for nearly two years, continuing into April 2016. As Brazil and Russia-fund performance rebounded in recent months, redemptions from China-focused funds has intensified, indicating there is likely no near-term relief for the universe’s aggregate redemption pressure.
Regional Flows Overview
- The majority of industry redemptions in April, and YTD 2016, have come from funds operating in the US, however flows out of funds located in Asia jumped in March and were negative again in April. Investors withdrew a net of $1.38 billion from Asiadomiciled funds in April, bringing YTD redemptions to $3.8 billion.
- For a second consecutive month, the level of redemptions pressure for Asia-based funds is on par with what the universe last experienced in Q1 2009, coming out of the financial crisis. The main difference being, while the absolute level is similar, March and April outflows are a significantly smaller portion of the region’s current asset base.
- Redemptions from China-focused funds reporting to eVestment were $186.3 million in April, down from the level seen in March, when the first spike of redemption pressure for the universe since losses and volatility emerged in H2 2015. Reporting Chinafunds indicate redemptions of $502.1 million YTD 2016.
- Not all emerging market strategies are having a difficult time attracting investor interest. The five funds receiving most new allocations in 2016 returned an average of 6.9% in 2015 and include products focused on multi-strategy, credit, Brazil and China, all segments which in aggregate lost assets in April. The implication being that investors are willing to allocate to regions and strategies which have underperformed in recent times if managers have shown the ability to perform well in the face of the difficult environment.
- Funds operating out of Europe have been receiving assets at a greater pace than the other major domiciles in 2016. Interest is primarily focused on large funds, but allocations have been into a diverse set of exposures. Products targeting European equity markets have seen interest from investors, as well as many of the major managed futures funds in the region.