Assets continued to flow into hedge funds in February

The industry saw net inflows in February, but that has been the norm in February’s data post-2009. The level of net inflows would also appear to be nothing special as they were virtually identical to the average February net inflow over the past 11 years. But behind the aggregate data there is plenty to feel good about so far this year. February’s net inflow was the largest February in a few years and together with January’s upward revision the industry has equaled its best start since 2014. It doesn’t stop there, however. The breadth of success has also been excellent, a recurring theme since post-Q1 2020 (post-COVID onset), with the highest proportion of managers appearing to have net inflows since at least January 2016.

While most is well, all is not well. There have been some large redemptions clouding the otherwise positive sentiment for long/short equity managers, and inflows to macro managers feels more like a vote for future market uncertainty than for recent proof of being able to succeed in similar market environments. But let us bask in the known positives for the industry for at least one month.

Investors added an estimated $16.44 billion into hedge funds in February 2021, bringing YTD inflows to $23.74 billion. Performance was accretive to asset levels and total estimated industry AUM increased to $3.408 trillion.

February data tends to be positive, but YTD net flows seem good from multiple perspectives.
In both good years and bad post-2009, net flow data for February has consistently been positive, and February 2021 is almost right on the mark of the prior 11-year average. There are, however, a few ways to look at the flow data for 2021 to highlight what appears to be a very positive start to the year.

YTD net flows nearly match the best levels since 2014.
While February tends to be positive, this February is the best since 2015 and when combined with updated data for January showing a stronger than first indicated start to the year, net inflows YTD are on par with the highest levels seen since 2014, roughly the same as 2018.

The breadth of success has been high in 2021.
Reported data indicates over 60% of funds had net inflows in February following about 50% in January, which means the incoming assets are being relatively widely distributed. That’s a continuation of a theme which emerged post-COVID onset, and it is a good thing.

Monthly Absolute Net In/Outflow as a % of Prior Period Reported Assets, Jan 2015 – Feb 2021

Multi-strategy funds are seeing the strongest demand.
Net inflows for multi-strategy funds in 2021 are just about where they were at this point in 2020, and where they were in 2019. Both those years ended up being negative, but barring something unexpected (though frankly the unexpected has begun to feel far too familiar recently), this year feels different. At the simplest level, good performance among many large managers appears to have been attractive to investors. Average returns in 2020 from funds with the 20 largest inflows YTD 2021 was over 15%. It was also relatively good in 2019 (~9% vs. ~10% for the industry) and many of these managers performed well in 2018, an otherwise negative year for many. If you’re looking for a clear sign of strength for the industry in 2021, this is where to find it.

Long/short equity appears to have had moderate interest in 2021, but there’s a lot more going on under the surface.
Net flows for long/short equity hedge funds are negative YTD, which follows a few years of net outflows. It could seem that 2021 is just another year where investors are saying they’re not interested in adding assets to the space, but that’s not the case. More than half of funds in the universe appear to have net inflows YTD and removing a small handful of products which have had a difficult stretch, overall net flows would be firmly positive. There is clear interest in technology and healthcare-focused products, but net inflows go beyond sector-focused funds. If we can add one caveat to this caveat-filled space, it is that where net inflow success appears to be most positive, there have been some 2021 performance hiccups.

Net flow for macro funds have been positive, but all doesn’t feel positive.
For multi-strategy funds the general scenario seems clearly positive, performance has been consistently pretty good and assets are following. For macro as a whole, while the data is positive it doesn’t feel at all similar. This is most likely because among the products with the largest net inflows in 2021, some had outflows in February, some underperformed last year, and some are underperforming so far this year. It feels more like assets are coming in because of an uncertain outlook across many markets, rather than recent performance being rewarded. Maybe, despite the foreboding feeling it represents, that is also a healthy sign for the industry.

Emerging markets interest appears light, but there are segments seeing demand.
Net flows for emerging markets focused funds appear to have been uninspiring in 2021, but that is more about segmented demand, or lack thereof. Redemptions have come from funds focused on Eastern Europe and Latin America, but there have been meaningful allocations to macro-oriented EM funds as well as those focusing on Chinese equities, while China credit-focused products have seen mixed interest. Usually we do not focus on EM products in these reports, but when the numbers don’t tell the full story it is worth highlighting where there is demand.