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Winners and losers: How 2020’s hedge fund performance is now weighing more heavily on investor allocations

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The sharp dispersion in hedge fund performance is having a more noticeable impact on where investors choose to allocate – and withdraw – their money this year.

New industry research shows that while allocators removed USD9.6 billion from hedge funds during September, they still pledged some USD8 billion to the industry throughout Q3 – the first time since Q1 2018 that hedge funds registered positive quarterly inflows.

And against a backdrop of huge performance dispersion, it is the best-performing managers and strategies which are now attracting the most new capital from allocators.

“The data is showing it over and over across multiple strategies, that those gaining new assets are among the outperforming managers, while the largest redemptions are coming from those with elevated losses,” eVestment said this week.

“Yes, the largest flows on both sides are among larger products and that is partly a factor of size, but the data through September suggests a fair number of smaller funds have been successful at raising capital in 2020.”

Year-to-date redemptions to the end of September reached USD47.75 billion, with total industry assets now standing at USD3.16 trillion globally.

Investors in long/short equity strategies have been particularly influenced by performance, with pockets of withdrawals offset by fresh allocations to outperforming managers in Q3. Although long/short equity funds suffered USD750 million in outflows in Q3, investors added USD930 million in the month of September.

Nine out of the ten long/short equity strategies with the biggest allocations have posted positive performances this year. The average return across all ten is around 20 per cent.

On the downside, of the ten funds with the biggest redemptions during Q3, nine are negative for the year – with the average loss totalling almost 14 per cent.

Similarly, macro remains a strong driver of flow volume and activity, with Q3 seeing “large movements” of investor capital around macro-focused strategies.

Overall, investors poured some USD1.48 billion into macro hedge funds in Q3 – but that masked some “large and concentrated” withdrawals, with certain managers now facing a “rocky” end to the year.

“Of the ten funds with the largest inflows, nine have posted positive results this year and the one which hasn’t is basically flat,” eVestment added. “Of the ten with the largest redemptions in September, eight are negative year-to-date with average losses of 7.40 per cent.”

Elsewhere, allocators fled credit strategies during September, with March’s sharp losses seemingly still a drag on flows into September.

“Redemptions were swift in March, high again in June and while lower in September than those other months, still higher than any other month of 2020.”

In a quarterly commentary, eVestment said: “There were months not too long ago when we would consistently focus on the evidence of increasing concentration of assets among the largest managers in the hedge fund industry.

“As the post-pandemic environment continues to create greater dispersions of returns across the industry, however, this evidence of rising concentrations of assets is not the primary theme in the data.

“What is more noticeable is the influence of returns on both allocations and redemptions.”

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