Hedge Funds Inflows Muted, Assets Decline for Second Time

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According to eVestment, total assets in hedge funds declined in July, dropping 0.49%, the industry’s second monthly asset decline in 2014. Performance accounted for the majority of the dip. Investor flows, though positive for the seventh consecutive month at $4.9 billion, were below the last twelve-month inflow average of $14.6 billion.

Hedge funds AUM remained above $3 trillion mark despite decline in assets

Despite the asset decline, total industry AUM remained above the $3 trillion mark at $3.017 trillion. July’s net inflow pushed year-to-date total net inflows above $100 billion, a level the industry has not seen since 2007.

The primary reason for muted net inflows in July were redemptions from credit strategies, which saw $2.4 billion redeemed during the month. Credit fund flows had been positive in each of the last three months, however in a declining trend.

Directional credit and MBS-focused strategies were the primary source of credit fund outflows in July. Redemptions from directional credit funds have been elevated for two consecutive months, ultimately pushing 2014 year-to-date flows into negative territory.

Investor interest in equity exposure remained high in July and has been positive in each of the last thirteen months dating back to the interest rate spike in May/June 2013. The $8.3 billion of new inflows in July brings YTD totals to $74.0 billion, by far the largest inflows for the group since 2007.

Hedge funds inflows

The primary driver of new money coming into hedge funds focused on equity markets has likely been a repositioning of institutional assets away from traditional long-only US equity strategies in search of flexible directional exposure to global capital structure opportunities via hedge funds.

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Event driven funds have also been a beneficiary of the repositioning of institutional assets away from long-only US equity strategies. The universe brought in an estimated $2.2 billion in July and has had the second highest inflows behind long/short equity in 2014, $37.2 billion.

Flows into activist strategies were muted in July, receiving an estimated $195 million, though enough to lift YTD total inflows above $13 billion. Total assets in hedge funds reporting to eVestment which may employ activist strategies were $89.3 billion at the end of July.

Investors continued to allocate into strategies focused on European markets in July, a continuation of a year-long trend and a sign of investor confidence in the presence of opportunities in both European credit and equity markets. Inflows were $2.4 billion in July and $25.0 billion in 2014.

Macro strategies faced another month of elevated outflows

Macro strategies faced a second consecutive month of elevated outflows in July with an estimated $2.5 billion redeemed. This has brought the group’s YTD flows into negative territory. If the current trend continues, macro funds will have experienced net outflows for two consecutive years, which has not occurred since at least 2003.

Investors continued to allocate to emerging market hedge funds in July, the group’s fourth consecutive month of net inflows, albeit well below the pace seen in Q2. New allocations to Latin America focused funds were a primary source of July’s increase.

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