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December net hedge fund outflow far lighter than recent years

26 January 2021
Investors removed an estimated $9.74 billion from hedge funds in the final month of 2020. YTD redemptions are estimated to be $58.76 billion. Total estimated industry AUM sits at $3.360 trillion.
By Peter Laurelli, CFA | eVestment Global Head of Research

There are few who can look back on 2020 and say they saw it coming. There are many hedge fund managers, though, who can look back on 2020 and say that while they may not have anticipated the year we lived, they did have a sense of how various government and monetary authorities would react and the resulting influences those actions would have on financial markets and asset prices.

For others, and some very experienced managers and systematic approaches which have endured long periods of success even during the Global Financial Crisis, they were unable to navigate the calendar year successfully. Success, however, is not measured in calendar years, rather in the often-mismatched timeframes of a manager’s career and an investor’s allocation.

The events of 2020 shone the light on some of the real strengths and weaknesses of our world and its leaders, and it had a similar impact within the hedge fund industry.

Investors removed an estimated $9.74 billion from hedge funds in the final month of 2020. YTD redemptions are estimated to be $58.76 billion. Total estimated industry AUM sits at $3.360 trillion.

Industry Flows

Dec 2020 Hedge Fund Industry Flows

Key points from December’s data:

December redemptions are the norm, but December 2020 was lighter than normal.
Since 2008, only once have net flows been positive in the final month of the year (2010, $2.4 billion). Since 2009, the average of December net flows has been $16.5 billion making the redemption in December 2020 a decent figure for the industry.

The volume of net flows ticked higher but was also below past Decembers’ average.
While the net flow figure was muted for a December, the volume of asset movement during the month was relatively high compared to a six-year average, though still below the average of past Decembers. What this means is that despite muted flows for a December, there was still a relatively large amount of money moving in/out on a net basis during the month.

Multi-strategy outflows in December do not tell the story of the group’s 2020.
Prior to December and with the overall industry seeing net outflows, multi-strategy fund net flows had been positive, despite elevated outflows in the quarter after the pandemic’s onset. Many large funds within the group have been performing very well, which makes the year-end redemptions from the group seem out of place. While we do not name specific products when it comes to flows, the primary influence on multi-strategy redemptions in December were not due to dissatisfaction with performance, but from manager-driven changes in asset composition.

Allocations to macro in December are an ongoing anomaly.
As the overall industry has consistently experienced net outflows in December, a theme shared by macro strategies as a group through 2017, macro fund flows have been positive in December 2018, 2019 and now again in December 2020. While some of the funds seeing net inflows performed well in 2020, some did not, and others were around average. The post-pandemic performance, especially in July and in the last two months of the year, appear to have assuaged investor concerns toward some of the largest funds. And for others, December allocations appear well earned for significant outperformance in a very difficult year.

Managed futures flows end 2020 on a high note.
The managed futures space is one where performance appeared to have a clear impact on year-end flows. Among the largest December inflows are products which produced double-digit gains in 2020, but also a couple whose returns were mediocre. On the outflow side, however, every one of the largest redemptions to end 2020 were from products with performance losses in 2020.

Regional Flows

Dec 2020 Hedge Fund Regional Flows

Long/short equity flows heavily impacted by returns in 2020.
The bulk of redemptions to end 2020 came from products which had a difficult time navigating the volatile year. The group driving outflows in December produced average returns greater than -10% in 2020 and the ten largest redemptions for the year came from products producing average returns of -6.4%. While poor performance was met with outflows, the other side of the coin was also true in 2020. The ten largest net inflows in 2020 went to products producing an average return of nearly 30% for the year. And these are not smaller funds, as the average AUM of this group leading inflows in 2020 was over $4 billion.

2020 proved difficult for many, but not all credit strategies.
Net flows for credit strategies in 2020 were negative, and the largest outflow since 2016. Back then, funds came under pressure for producing consistent losses in a difficult environment beginning the second half of 2015, but this year it was the shock of losses in March which fueled redemptions for the rest of the year. If there is a bright side, it is that performance has generally been very good since March and redemptions in December were the lightest year-end outflow since 2013 (-$3.34 billion). Additionally, while it was a difficult year for many flow-wise, there were managers who both performed well and saw positive investor interest. This is a similar theme across much of the hedge fund industry in 2020, a year which will go down as one of the most difficult ones on record to navigate, but also one where overall net flow seemed as though it might have been much worse than it was.

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