It is promising to see investor allocations return to positive to begin the second half of 2017. It is promising to see the confidence in macro strategies being maintained, for now, and to see long/short equity funds again being a supporting strategy for the industry. It is also positive, in the way that accepting difficult truths is positive, to see investors showing concern about the varying and ultimately underperforming returns coming from the managed futures segment, and to see that allocations are going to fewer long/short equity strategies, and to those employing “modern” approaches.
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These things are positive because they signal the industry is being used as it should be, and investors are reacting as they should be. This is ultimately positive because it shows there is support for hedge funds, however it is clear support is not universal.
- Investor flows were positive in July, an estimated $7.9 billion was allocated. YTD flows surpass $30 billion and industry AUM very near all-time peak.
- Investors signal confidence in macro investing thesis entering H2 2017.
- Managed futures funds, particularly in Europe, are facing redemption pressures.
- Long/short equity strategies seeing elevated interest, however inflows are highly concentrated among minority of strategies.
Inflows Return in July, Fourth Consecutive Month of Directional Shift
Investor flows were positive in July 2017. Investors added an estimated $7.91 billion during the month, bringing YTD flows to $30.5 billion. Total industry AUM sits at $3.163 trillion, its second highest month-end level on record.
- A redistribution of assets is evident across funds.
For the fourth consecutive month, a greater proportion of funds have had net inflows than outflows. For a second consecutive month, the proportion of funds losing more than 2% of AUM from outflows, and more than 5% of AUM from outflows has been elevated, while the proportion of funds gaining the same levels due to inflows has not increased. With more funds getting new money than losing money, and a higher proportion of funds losing larger proportions of their AUM, this signals money being taken from a few, and being allocated to more. While we cannot trace assets across funds, and redemptions and allocations are not concurrent, the theme is present, though admittedly non-linear.
- June redemptions from macro funds was not the beginning of a new trend of negative sentiment.
Macro hedge funds had positive net flows in each of the first five months of 2017, and had been leading the industry’s asset gathering efforts. A string of three months of aggregate performance losses driven by some of the largest managers appeared to shift sentiment negative, as redemptions appeared in June. That negative tone appears to have been short-lived as investors returned to macro strategies in July. Whether or not the full effect of the April-to-June losses has been felt is yet to be seen, but current month flows are a sign investors have maintained faith in the strategy, and have their sights set on the longer term.
- Managed futures are not seeing the same level of investor confidence as macro managers.
Despite a rebound in July, managed futures fund performance has been disappointing in 2017. Unlike the faith being shown to macro managers, sentiment toward managed futures strategies is wavering. Given the time it takes to make a redemption decision, and given the backdrop of four consecutive months of performance losses prior to July, the near-term outlook for managed futures flows is likely negative.
- Long/short equity funds are in the midst of a revival, however inflows are not widespread.
Perhaps buoyed by the run in equity markets, and also the thought that having some short exposure is prudent, long/short equity flows are now firmly positive in 2017. The bad news is that while 49% of all long/short equity funds had inflows in July, only 39% have had inflows YTD. Additionally, a big chunk of YTD inflows have been to quantitative strategies, which further narrows the group of funds to benefit should current trends continue.
• MBS strategies have been under a lot of pressure, even while sentiment to credit has been shifting positive.
While some of the weight has been lifted off credit strategies after large redemptions in 2016, MBS strategies have quietly been facing elevated redemptions pressures, despite decent returns.
- Multi-strategy funds continue to face redemption pressures.
Returns from multi-strategy hedge funds have been reasonable. The performance issues the group faced in H2 2015 and early 2016 have not persisted. Despite what seem to be encouraging returns, the group has felt a steady weight of redemption pressures which have persisted into July. This is not encouraging, because it signals a weakening of confidence in the strategy as a whole.
Final Strategy Thoughts:
It is promising to see investor allocations return to positive to begin the second half of 2017. It is promising to see the confidence in macro strategies being maintained, for now, and to see long/short equity funds again being a supporting strategy for the industry. It is also positive, in the way that accepting difficult truths is positive, to see investors showing concern about the varying and ultimately underperforming returns coming from the managed futures segment, and to see that allocations are going to fewer long/short equity strategies, and those employing “modern” approaches. These things are positive because they signal the industry is being used as it should be, and investors are reacting as they should be. This is ultimately positive because it shows there is support for hedge funds, however it is clear support is not universal.
EM Inflows Stalled in July, Allocations to Europe-Domiciled Funds Continued
- What had been a two-month resurgence of interest in EM strategies faded in July.
Despite the seven consecutive months of very strong relative returns from EM strategies compared to their developed markets peers, EM strategies were not able to attract net new assets for a third consecutive month in July. Redemptions were not high, however, and outflows seemed to be targeted to a handful of underperforming strategies. While aggregate data appears negative, at the fund level it does not appear sentiment has shifted back to negative.
- Europe-domiciled inflows are primarily the result of interest in equity exposure.
The main Europe-based asset gainers in July were the same products which have been successful at raising new capital for most of the year. This includes both global and Europe-focused long/short equity funds, as well as a handful of macro managers. The one segment weighing on European fund flows in 2017, which was also negative in July, is managed futures.
Article by eVestment