If December 2017 was a unique month because of the lack of redemption pressures facing hedge funds, January was even more unique in terms of new allocations. Interest in the industry to start the year was far more wide-reaching than 2017, and the lack of redemption pressures appeared to carry over into the new year. Old themes persisted and certain strategies saw a revival. All in all, January’s data indicates it was a very strong start to the year for hedge fund asset flows.
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- Investors allocated an estimated $14.12 billion into hedge funds in January, the industry’s largest start to a year since before the Financial Crisis.
- Equity strategies continued to receive new allocations, with a preference for global exposure over the US, and developed markets over EM.
- Investors showed renewed interest in macro strategies, and continued to allocate to managed futures.
Investors Give Hedge Funds a Positive Sign to Start 2018
Investors added an estimated $14.12 billion into hedge funds in January, marking the first positive net flow to begin a year since 2014. With another month of asset-weighted performance gains (22 in last 23 months) and positive net flows, the industry again sits at its highest level of AUM on record.
- This level of inflow in January is an exceptionally positive start to the year.
January doesn’t typically produce positive net flows from the industry. February has historically been the month when new-year inflows begin to outpace any overhanging redemption pressures. From 2010 to 2017, every February has produced positive net flows, far better than the 5 of 8 January’s. February’s average net flows over those years was nearly $20 billion, compared to negative $1.43 billion for those January’s. The point is, January 2018 was the best net inflows the industry has seen since pre-Financial Crisis.
- Inflows were more widely distributed in January than what was normal in 2017.
In 2017, the average proportion of monthly net inflows captured by the top 5th percentile of asset gainers was about 55%, and in January 2017 it was near 60%. Elevated net inflow capture by the largest asset gainers is a sign of asset consolidation. In January 2018, this figure was 49%. If this figure stays low, while flows stay positive, it would be a sign investors are allocating across a wide breadth of funds in 2018. We will watch this number closely.
- Macro see large commitments to start 2018.
It was an up/down year in 2017 for macro hedge funds. It began with elevated investor interest (similar, but not as much as 2018), but as losses emerged in Q2 2017, redemptions soon followed. After four consecutive months of redemptions to end 2017, investors appear very willing to give the group another chance in 2018.
- Interest in long/short and market neutral equity continues into 2018.
After industry leading inflows in 2017, long/short equity strategies are again at top-of-mind for investors entering 2018, as are their market neutral brethren. Event driven strategies, however, again separated themselves from their long/short peers with ongoing net redemptions. Interestingly for event driven strategies, they had well below average breadth of products with outflows in January, an indication that redemption pressures were very targeted in January.
- Interest in managed futures persists.
We mentioned several times last year what a difficult time it must have been for many investors in managed futures strategies. After a very rocky H1 2017 (after an equally rocky H2 2016), the group produced some extravagant returns near the end of the year. Investors dipped their toes back in during Q4, and have continued in January. Allocations were broad (only 30% with redemptions), but there were some elevated targeted redemptions, an indication 2017’s volatility was not for everyone.
- Weight still hangs on multi-strategy funds
Despite some large funds which performed well in 2017 benefiting with new inflows in January, the weight of some underperformers negatively impacted the universe’s net flows to begin the year.
Mixed Demand for Emerging Market Strategies to Start 2018, Debt Markets Preferred Over Equity
- Despite targeted allocations, investors did not follow EM’s 2017 performance to begin 2018.
Emerging market hedge funds had the broadest levels of redemption pressure to begin 2018 with 55% of reporting funds facing net outflows.
- Interest in China exposure very mixed to begin 2018.
China-focused funds received among the largest new allocations, and largest redemptions to begin 2018. Investors appear less enamored by equity exposure to the country, and allocations were concentrated within Chinese debt-focused strategies.
- Broadly a preference for debt over equity within EM to begin 2018.
The debt/equity theme extends beyond China. Of the products with the five largest net inflows in January, four were debt focused. The reverse was true for those experiencing the largest outflows.
- The US as a targeted investment region continues to see negative investor sentiment.
Products targeting US markets have seen a slow, but steady deterioration of their asset base from redemptions. While there is a small handful of very successful quantitative equity strategies receiving new allocations, there are many long/short equity and event driven funds which have seen outflows. This trend follows the themes of international preferences on the institutional, traditional side of the industry, though there the primary beneficiaries have been passive strategies.
Article by eVestment