Investor Redemptions Outpace New Allocations for Second Consecutive Month

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redemptionsTotal hedge funds assets were virtually unchanged in October, decreasing 0.0002%, to $3.020 trillion, according to new data from eVestment . Performance gains among many large funds accounted for an asset increase, while redemptions outpaced new allocations for an outflow of $2.9 billion during the month.

The $2.9 billion outflow in October was the second consecutive month in which investor flows were negative. The industry has not had two consecutive months of net outflow since mid-2012, in the wake of volatility from the European sovereign crisis.

Investor sentiment towards equity strategies was negative for the second consecutive month in October, confirming a deviation from the positive trend which had been in place the preceding fourteen months. With equity strategy’s October’s $2.0 billion net outflow, investors have withdrawn $6.0 billion from this segment in the last two months after allocating $105.5 billion since June 2013.

October redemptions from equity hedge funds appear driven only in part by recent volatility. The majority of redemptions in October came from funds with elevated loses in June and July. Several of these strategies subsequently performed well in October and even September, but redemption decisions appear to have been solidified. Given that losses were elevated elsewhere across the universe in September and October, we may see redemption pressure persist for equity strategies intoyear-end.

Three consecutive months of asset-weighted performance declines, preceded by one month of near flat returns, appears to have weighed on enough credit fund investors to cause redemptions to outpace new allocations in October. The universe had not produced three consecutive months of negative asset-weighted returns since the 2008 financial crisis, though losses in mid-2011 (the onset of Europe’s sovereign difficulties) were greater than the universe’s current drawdown. Investors redeemed an estimated $2.7 billion from credit strategies during the month.

Investors are not shying away from all segments of credit markets. Distressed hedge fund flows were firmly positive in October, a $1.0 billion net inflow, continuing a streak of positive investor sentiment which has persisted for ten months.

Event driven strategies, which have had elevated losses in the last two months, have not yet felt the same impact on flows as long/short equity strategies. This underscores the notion that redemption pressure takes time to build, which then implies event driven funds may also be facing redemption pressure into year-end.

Macro strategies, which have not enjoyed the same level of recent performance gains as managed futures funds, again faced elevated redemptions in October, losing $3.4 billion in assets.

Managed futures funds had net outflows for the fourteenth consecutive month in October, further evidence that investor flows take time to react to near-term performance success. Investors are likely taking a hard look at their exposure to managed futures funds, but if the universe is unable to attract assets in an environment where their performance is relatively strong, then thelong-term outlook for the predominantly systematic strategies may be highly negative.

With $4.0 billion of inflow in October, multi-strategy funds own the industry’s longest span of positive investor sentiment, sixteen months, dating back to June 2013. Their success is evidence of institutional investors persistent interest in hedge fund exposure.

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