eVestment: Hedge Funds Book Fourth Consecutive Quarter of Outflows

Oct 26 2016 | 8:55pm ET

Hedge fund were negative for the fourth consecutive quarter in Q3, according to new data from eVestment, while redemption data for September does not augur well for fourth quarter figures. 

Unlike prior periods of elevated redemption pressures, public financial markets are openly operating at or near crisis or post-crisis modes, eVestment observed in its latest Asset Flows Report. This suggests the industry itself may be at an inflection point. 

Granted, Q3 data offers a bright point for every negative reading. Managed futures, for instance, are experiencing a good run of inflows, although recent returns may cause the trend to moderate. Commodities, too, have been favored for much of this year, but outflows returned in September, eVestment said. 

It is worth pointing out that in contrast to previous periods of redemption pressures, returns are not correlating that well with investors asking for their money back. Even the industry’s best performing segments, distressed and event driven, continue to be beset by redemptions, according to eVestment’s data. 

To the figures: Investors redeemed an estimated $10.3 billion from hedge funds in September, bringing Q3 redemptions to $29.2 billion - a level not seen since the first quarter of 2009. YTD outflows stand at $59.9 billion, indicating a potential crisis situation for the industry, according to eVestment’s VP of Research Peter Laurelli.

“The cumulative outflow in the last four quarters is $86.7 billion, less than half the level of redemptions in just the first quarter of 2009, Laurelli wrote in the report. “However, the difference is that financial markets are not in an overt crisis.”

Total industry AUM of $3.026 trillion still stands above the psychologically important $3 trillion mark.

Other key highlights of eVestment’s report:

  • For much of this year commodities funds have benefitted from inflows, as investors saw opportunities after a long string of dismal performance. But after two consecutive monthly performance declines, commodity funds experienced their largest monthly investor outflow since March 2015. YTD flows are still positive at $11.24 billion, but that number could shrink if investor sentiment continues to turn negative in the last quarter of the year.
  • Managed futures funds experienced their fourth consecutive monthly inflow in September, at +$0.73 billion, eVestment said. With Q3 net inflows of $6.35 billion, they were the only primary strategy where investors allocated with any gusto. However, twice as many funds experienced outflows as inflows during September, and universe has produced asset-weighted performance declines in five of the last seven months.
  • In spite of positive performance recently, distressed funds and event-driven funds both saw outflows in September, $1.13 billion and $2.26 billion, respectively. Both continue to add to their outflows this year, with distressed funds chalking up outflows of $5.64 billion YTD and event-driven funds seeing a whopping $33.3 billion in outflows YTD.
  • Private credit products, whose liquidity profiles generally aligns them more with private equity than hedge funds, have been in demand, highlighting a structural issue with hedge fund vehicles rather than with demand for a specific manager skillset. While there appears to be demand for distressed and special situation investing, it is focused toward private markets and with the acceptance of longer commitments. 
  • Emerging markets funds have quietly seen a shift towards positive investor sentiment, with $1.09 billion in inflows in September. Although they are still negative for the year, with outflows of -$0.54 billion YTD, this is just a shadow of the $7.67 billion in outflows seen in 2015.
  • China-focused funds saw slightly positive flows in September, a potentially significant development as negative sentiment has prevailed across the China fund universe since August 2015. Unlike China, sentiment to Brazil focused funds was not positive in September, but was positive for Q3 thanks to inflows in July. Flows have been mixed, but negative for the year.

Atlanta-based eVestment was founded in 2000 by Jim Minnick, Matt Crisp and Heath Wilson. The company boasts one of the most comprehensive global databases of traditional and alternative strategies and provides institutional investment data intelligence and analytic solutions to clients worldwide.

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