The hedge fund industry experienced another wave of investor inflows in November following two months of light redemption pressures. With over $40 billion of net new assets added in 2017, the industry would appear to have returned to health. However, the proportion of funds actually receiving net new assets is well below
half. Consolidation of assets via flows is not a new concept for the industry, though it is important to keep in mind when viewing the year’s positive results.
Despite consolidation being present in virtually every strategy in 2017, the winners, losers and comebacks are becoming evident.
- Investors added an estimated $10.79 billion into hedge funds in November lifting 2017 net flows to over $40 billion.
- Managed futures gained assets for a second consecutive month as strong performers were rewarded.
- Macro fund outflows continued into a third consecutive month, losing their lead in 2017 inflows.
- Long/short equity (including quantitative directional strategies) have overtaken macro funds for most popular for new investment in 2017.
Elevated Inflows Seen in November, Long/Short Equity Remains Popular
Investors added an estimated $10.79 billion into hedge funds in November. Net flows into the industry for the year are now $40.10 billion. Continued performance gains along with new allocations lifted total industry AUM to yet another new all-time high.
- Industry assets are growing despite a minority of funds experiencing inflows.
While November was positive both in terms of flows and the proportion of managers experiencing inflows (52% with inflows), only 40% of funds have net inflows for the year. The implication is that while overall inflows indicate the industry is healthy, the health is not widespread, and assets are consolidating.
- Losses in Q2 have a negative impact on macro flows for a third consecutive month.
Redemption pressures weighing on macro strategies continued into November. The last two times macro funds had at least three consecutive months of redemptions (strings beginning in November 2015, and June 2016) they were also preceded by elevated losses a few months prior.
- There appear to be enough decently performing managed futures strategies to drive net inflows to the strategy in recent months.
The average 2017 return of the ten largest managed futures asset gatherers in the last two months is nearly 5%, with only one fund in negative territory. That’s nearly 300bps better than the universe’s average return in 2017. The average return for those losing the most to redemptions in the last two months is -4.83%. Only three of those have produced positive returns, and only one has done better than the average of the best asset gatherers mentioned above.
- Long/short equity is now the most popular strategy of 2017.
Despite having similar consolidation characteristics (only 40% of reporting funds have net inflows for the year) to the overall industry, long/short equity funds’ large inflow in November pushed them past macro as being most in demand in 2017.
- Investment in multi-strategy funds rebounded in November, now positive for the year, but consolidation of flows is elevated.
Not to beleaguer the point, but the consolidation of assets within the multi-strategy universe this year is much higher than average (only 33% with inflows), yet the universe’s elevated inflows in November pushed aggregate flows for the year positive.
- Investors allocating to credit strategies, but prefer directional strategies to arbitrage.
Directional credit fund flows have mirrored those from their traditional, long-only counterparts in 2017, and now stand firmly positive YTD. Conversely, investors in credit arbitrage have consistently seen assets removed throughout 2017.
- Investors leaving commodity funds as prior allocations have mostly been met with losses.
Interest in commodity strategies firmly turned positive back in June of 2015, generally remaining so while performance was very mixed. Elevated outflows in the last three months, however, indicate investor dissatisfaction with returns and future opportunities.
Emerging Market Inflows Continued, and European Fund Interest Rose in November
- EM interest in November was focused on either Global, or Asia-focused funds.
Among the largest gainers of new EM assets in November, exposure was primarily either global, or focused on Asia, China in particular. Three of the top five asset gainers were credit-focused as well.
- Allocations to Europe-domiciled funds were spread across strategies in November.
Europe’s hedge fund industry had a very positive month of new allocation in November. While normally aggregate inflows or outflows are dominated by one or two strategies, across the top six asset gaining products in November, each operate different strategies. The only underrepresented strategy among European funds with inflows was event driven.
Article by eVestment