Continued positive aggregate returns to start Q4 lifted hedge fund assets to another all-time high, despite net flows in negative territory for a second consecutive month. On a net basis, outflows were small again in October, but the industry felt redemption pressures more broadly than much of the year. Allocations and redemptions were highly concentrated, more so than any other month of 2017.
At the strategy level, there was a mixed bag of trend halts, shifts, and resumptions. Notably, interest in managed futures strategies rose, while macro redemptions continued. Credit/fixed income market exposure (both developed and emerging markets) continues to be an area of high interest to investors not only within the hedge fund space, but from institutional investors in traditional long-only strategies.
- Despite redemptions of $2.9 billion from hedge funds in October, performance gains again lifted the industry to an all-time peak AUM.
- Managed futures’ 3-month streak of redemptions reversed in October.
- Macro fund outflows continued amid lingering redemptions related to Q2 performance losses.
- Steady demand for market neutral equity has pushed the strategy to be among 2017 leaders.
Flows Slightly Negative to Start Q4, Managed Futures See Interest
Investors withdrew an estimated $2.94 billion from hedge funds in October. Net flows into the industry for the year are now $33.26 billion. Performance gains offset redemption pressures for a second consecutive month, lifting total industry AUM to another new all-time high.
- Elevated proportion of managers saw redemptions in October.
The proportion of funds losing assets in October was similar to the proportion seen in September, roughly 54%. Both levels are higher than any other month of 2017, but again net redemptions were not generally high during October. The largest asset gainers, and losers, however, accounted for the highest proportion of inflows and outflows for the year, an indication that both inflows and outflows were relatively highly concentrated during the month. This measurement is the proportion of all inflows/outflows accounted for within the products in the top 5th percentile of inflows/outflows.
- Macro fund losses in Q2 appear to have impacted flows for a second consecutive month.
Three months after a string of three monthly assetweighted performance losses ended in June 2017, macro funds had their second monthly outflow of 2017. One month later, in October, redemptions increased, and nearly 60% of reporting managers faced outflows. The strategy remains the most allocated to within the industry in 2017, and returns have since rebounded.
- Managed futures gets a reprieve from investors to start Q4.
Similar to macro strategies, managed futures products produced aggregate asset-weighted performance declines in Q2 2017, however managed futures’ performance losses started one month earlier in March. Investors had a similar reaction, resulting in elevated redemption pressures. While returns have since rebounded, again similar to macro, unlike macro strategies redemption pressures abated in October, resulting in the strategy receiving somewhat unexpected inflows to begin Q4. Unexpected because managed futures returns have been fairly volatile for many months, though those with the largest inflows in October, and also 2017, have been outperforming their peers.
- Market neutral equity strategies have been consistently gaining new assets in 2017.
Three-quarters of market neutral equity strategies have had net outflows in 2017, the highest proportion of any major industry segment, yet monthly allocations have been consistently positive since November 2016. And while no month has produced industry leading inflows, the segment has become one of the new allocation leaders of 2017. The implication is that a small proportion of market neutral strategies are gaining a meaningful amount of new allocations in 2017.
- Credit strategies continue to gain new assets, mirroring trends among institutional long-only strategies.
Institutional investors clearly have demand for credit exposure, which is a noticeable change from both 2015, and 2016.
EM Strategies Received Elevated Inflows in October, Interest Focused on Credit Opportunities
- For a second consecutive month, investors made a push into EM strategies.
Flows over the last six months have affirmed investor interest in emerging markets exposure. During this span, four of six months have seen elevated inflows and in the two months where there were redemptions, outflows were minimal.
- Interest in EM is targeted mainly to credit strategies.
The primary EM-focused gainers of new assets in 2017 are products focused on credit opportunities. Of the top ten asset gainers this year, six are credit-focused. Of the top five, four are focused on credit opportunities.
- Investor interest in China is positive for the year.
After about 50% of reporting China-focused funds having inflows in September, nearly 80% did in October. Reporting funds YTD have had aggregate net inflows, and even removing the largest asset gaining product, which accounts for a large portion of the segment’s overall inflows for the year, aggregate flows are still positive in 2017.
Article by eVestment