Hedge Funds – Outflows Accelerate, Performance Still to Blame
Highlights
- Investors removed an estimated $25.2 billion from hedge funds in July, bringing YTD net flows to negative $55.9 billion.
- Redemption pressures in credit and multi-strategy funds reached crisis-like levels in July. Multistrategy funds faced their largest monthly outflow since April 2009 and redemptions from credit strategies rose to their highest level since September 2011.
- Commodities continue to be a bright spot. Investors added $2.7 billion into the segment in July.
Summary
The hedge fund industry again suffered large aggregate redemptions in July 2016. In terms of cumulative magnitude, the redemption pressures facing the hedge fund industry in the last two months are reminiscent of the second half of 2011.
There should be caution when classifying the industry as a whole, as it is more a sum of very unique parts, some of which have done very well in 2016. That we are forced to illuminate positive sentiment in the proverbial ashes, only illustrates the difficulty faced by many.
Outflows were highest among credit, multi-strategy, and event driven funds. Commodity funds continue to attract new assets, and there are signs of shaky sentiment within managed futures strategies, a consequence of volatile returns and losses earlier in 2016.
Hedge Funds – Outflows Accelerate, Performance Still to Blame
Investors redeemed an estimated net $25.2 billion from hedge funds in July. July redemptions follow outflows of $23.5 billion in June. The latest wave of redemption pressure brings YTD flows to negative $55.9 billion.
In terms of cumulative magnitude, the redemption pressures facing the hedge fund industry in the last two months are reminiscent of the second half of 2011, when in a four month span investors redeemed an estimated $42.0 billion. Unless these pressures recede, 2016 will be the third year on record with net annual outflows, and first since the outflows in 2008 and 2009, a result of the global financial crisis.
Flows Overview
- Investor redemptions from the industry continue to be driven by mediocre performance. Funds producing losses in 2015 are by far the primary source of outflows throughout the year into July. Additionally, in both June and July, redemptions have accelerated from within funds producing losses in 2016. Funds reporting the ten largest outflows in July have returned an average of -4.1% YTD, with average losses of -5.3% concentrated in Q1.
- There should be caution when classifying the industry as a whole, as it is more a sum of very unique parts. Many funds have received new allocations in 2016, including both June and July. The ten largest allocations in the last two months have gone to funds which have produced an average return of nearly 7% this year, and produced positive returns on average in 2015. That we are forced to illuminate positive sentiment in the proverbial ashes, only illustrates the difficulty faced by many.
- Commodity funds are one segment which has consistently attracted new allocations in 2016, including both in June and July. Investor sentiment to commodity funds has been positive for the last fourteen months, during which time investors have added an estimated $10.3 billion.
- Managed futures funds have been another aggregate bright spot for flows in 2016. This segment has been supported by some commodity-focused funds operating in futures markets. With those products excluded, we’ve begun to see redemption pressures emerge within a few of the large, archetypal managed futures funds. This is most likely due to elevated losses in the span of March to May.
- Multi-strategy hedge funds, which tend to have redemption notice requirements of 45 days or more, had another large month of outflows in July. Both June and July’s redemptions are notable as we have to go back to the heart of the European sovereign crisis in April 2012 to see non year-end monthly redemptions near these levels.
- July was a huge month of redemptions from credit strategies, the universe’s largest non year-end redemptions since September 2011. Again, performance appears to be at the heart of the redemption pressures.
- Event driven and macro funds were where redemptions were largest on a strategy level. Many credit strategies fall into the event driven category, however redemptions in both June and July have come from activist strategies and special situation credit funds alike.
Elevated Redemptions from Emerging Markets in July
What appeared to be a period of potential turnaround for EM hedge fund flows reversed in July to their highest redemptions in seventeen months. Outflows appear to be from a variety of strategies producing losses in 2015, and Q1 and/or Q2 of 2016. Much like much of the rest of the hedge fund industry, performance is weighing on emerging market fund flows.
Regional Flows Overview
- Negative investor sentiment still persists toward Asia-domiciled funds, however at a decreasing rate. The magnitude of redemptions from Asiadomiciled funds declined for the fourth consecutive month in July. Investors redeemed an estimated $840 million from the Asia-domiciled hedge fund industry.
- Money continued to come out of funds investing in China in July. The $209.1 million removed from reporting funds was above the level seen in June, but still far less than its highest level in March 2016.
- While the bulk of the hedge fund industry’s redemptions have been coming from firms domiciled in the US, investing globally, it is important to note a distinction in the dispersion of flows by size and prior year performance across the industry’s domiciles. The US industry’s redemptions are targeted toward products which have produced losses, while funds which have performed well have gained new assets this year, in aggregate. Conversely, in recent months the Europe-domiciled industry has seen redemptions from each segment (large/small, 2015 winners and losers), while Asia-domiciled funds have experienced net redemptions across all segments both recently, and year-to-date.
- Looking for positive investor sentiment across the EM universe in the last two months shows a diverse set of characteristics of the winners. Many are long/short equity strategies, which would make these EM-focused funds stand apart from their developed market peers. Others are fixed incomefocused, whose EM exposure produced solid 2015 and 2016 returns, again a distinction from the broad credit-focused universe. Lastly, investors have been allocating to country specific strategies targeting Brazil and Russia.
