Investors redeemed an estimated net USD4.60 billion from hedge funds in March, the fifth month in the last six in which redemptions outpaced allocations, according to the latest eVestment Hedge Funds Industry Asset Flow Report.
Performance gains during the month offset redemption pressure, helping to increase total industry assets USD29.59 billion in March to USD2.982 trillion.
Investor flows were negative in Q1 2016. Net outflows of USD14.35 billion followed net outflows of USD26.77 billion in Q4. The current wave of investor dissatisfaction is similar to what the industry experienced in H2 2011 in the aftermath of losses from the first wave of the European sovereign crisis.
Redemptions across the hedge fund industry are currently focused on funds that performed poorly in 2015. Investors withdrew a net of USD15.94 billion in March from funds that produced losses in 2015. That brings YTD redemptions from funds that produced losses in 2015 to USD43.35 billion.
Investors have continued to allocate to large hedge funds that were positive in 2015, or funds in general which outperformed in 2015. Funds with greater than USD1 billion in AUM that were up slightly in 2015 had USD2.84 billion of inflows in March and USD6.30 billion in Q1, while both large and smaller funds that returned over 5% in 2015 had net inflows of USD10.36 billion in March and USD26.65 billion in Q1.
Performance declines from large macro funds in 2015 are the primary driver of negative flows in March and Q1 2016. Investors withdrew USD5.65 billion from large macro funds in March that posted losses in 2015, bringing YTD redemptions from that group to USD10.91 billion. The macro universe has received some new money this year, but it has been directed to larger funds that were able to navigate 2015 successfully.
Investor interest in commodity funds continued to be positive for a seventh consecutive month in March. Inflows were not large, estimated at USD80 million, but the universe’s inflows of USD3.96 billion in Q1 2016 put it ahead of all other primary markets.
Since eVestment began estimating monthly flows in October 2008, commodity funds have never experienced a string of seven consecutive monthly inflows. A six month string of inflows ending May 2011 was preceded by several months of large gains. What is exceptional about the current level of investor interest is that is was proactive, rather than reactive. Investors began allocating to commodity strategies while performance was still consistently negative. Returns turned positive in February and increased in March.
Managed futures funds continue to see strong investor interest. Investors allocated USD4.3 billion in March and the group leads all strategies in 2016. The group has not been able to maintain consistent returns over the last several months, but investors continue to see the space as a valuable alternative.
Multi-strategy fund flows were positive again in March as the group rebounded from redemption pressure at the turn of the year. Much has been made of Q1 losses from certain large multi-strategy funds in 2016, though losses do not yet appear to be impacting flows.
Despite pockets of good returns from Brazil and Russia-focused funds, investor sentiment towards emerging markets remains in a middle ground. There has been some interest in diversified EM strategies, but generally sentiment is mixed and investors appear to prefer to sit on the sidelines for now.
One clear theme from emerging markets in March was that losses and volatility from China-focused products have caused investor sentiment for funds investing in the country to reach the lowest point since losses emerged in H2 2015.
The majority of industry redemptions in March, and Q1, have come from funds operating in the US, however flows out of funds located in Asia jumped in March. Investors withdrew a net of USD1.99 billion from Asia-domiciled firms during the month, bringing Q1 2016 redemptions to USD2.89 billion.
This level of redemptions pressure for Asia-based funds is on par with what the universe last experienced in Q1 2009, coming out of the Financial Crisis. The main difference being, while the absolute level is similar, March outflows are a significantly smaller portion of the region’s current asset base.
Asia-based fund redemptions included outflows from funds investing in China, however there were a variety of pan-Asian strategies which saw redemptions in March.
Redemptions from China-focused funds reporting to eVestment were USD337.46 million in March. This marks the first spike of redemption pressure for the universe since losses and volatility emerged in H2 2015.
Investors appear to be in a wait-and-see mode with regards to broad emerging market hedge fund exposure. Aggregate emerging market fund returns shifted positive in October 2015, but investors have not shown any sort of consensus to allocate en masse, as of yet. Redemptions were low in March, USD220 million exited the EM universe, and there does not seem to be any sort of theme to the impact of size and returns driving performance. Additionally, there is little evidence of preference for asset class (equity vs. fixed income) either as both groups contain many products which have both lost money and gained new assets this year.
Outside of China, the only preferences visible within the EM universe are evidence of allocations to certain diversified emerging market strategies and slight signs of interest toward Brazil exposure.
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