BY PETER LAURELLI, CFA | EVESTMENT GLOBAL HEAD OF RESEARCH
June marked the resumption of redemption pressure for the hedge fund industry. Themes familiar to what played out for much of 2019 appear to have re-established themselves, though with negative investor sentiment being felt by many of those who were resilient to it in the recent past. If we look closely within various strategies, we find funds performing well, we see data suggesting some are effectively able to raise capital in this environment. Yes, if we look closely, we can find good news amongst the difficulties being faced by many.
Investors redeemed an estimated $16.9 billion from hedge funds in June. The outflow puts Q2 redemptions at $42.4 billion, and YTD redemptions at $55.4 billion. Performance lifted total industry AUM to $3.06 trillion.
Key Points from June’s Data:
Good news is hard to find right now.
The last time the industry had aggregate inflows in a quarter was Q1 2018. That is nine quarters without new money coming in outpacing money leaving. Some of the industry’s largest and long-standing firms are seeing large redemptions. Some of the firms which were leading the way for capital raising last year and into early this year have seen the tides shift. Finding good news within the data is possible, but when you have to hunt for good news, that is usually bad news.
The volume of asset movement appears to be normalizing.
As a reminder, the volume of asset movement is the sum of the absolute value of flows in the month divided by the prior month’s assets and measures what % of reported assets are “in motion” during the month. The value has declined and is similar to what has been experienced in June in the past. The value declining would not be filed under “good news,” unless it was accompanied by net inflows in the month. All it means is the reactionary nature of flows post-pandemic onset appears to be settling.
Monthly Absolute Inflows & Outflows
Monthly Absolute In/Outflow as a % of Prior Period Reported Assets, Jan 2015 – June 2020
Investor redemptions from macro funds returned in June.
The reprieve from redemption pressure macro funds enjoyed in May did not last long. June redemptions put H1 2020 net outflows just over $20 billion. This is not a universal issue, however, if we’re looking for a positive spin, rather redemptions are high within a small segment, but they are quite high. Interestingly, looking at the macro funds which are among those able to raise net new money in 2020, there are several systematic strategies in the group. These products have not necessarily performed better than their macro peers this year, but they almost universally did so last year.
Credit funds saw a jump in redemptions in June.
We noted in prior reports there were some meaningful inflows for some credit strategies in April and May, but that interest (it still continued for some) was overtaken by a wave of redemptions to end Q2. Those experiencing the largest outflows were a mix of funds; some focused on securitized markets from MBS to insurance-linked securities, while others have broader mandates under the “alternative credit” umbrella. It appears that for some, the fallout from losses during the pandemic’s onset were a sign to exit, while for others it was an opportunity.
Long/short equity outflows were elevated for a second consecutive month.
Actually, flows in this group have been negative for a while, with the exception being February of this year, but there had been some managers posting good returns who were also able to raise meaningful assets both last year and into this year. That theme changed with the onset of the pandemic. These products produced elevated losses, some of which continued into June, which means redemption pressures here are likely not over.
Some good is going on within the managed futures segment.
We have been consistent in our duty to point out the difficulties many managed futures strategies have been experiencing not just this year, and not just last year…and not just the year before that. It has been difficult for many, but the last two months have been intriguing. In May, flows were near flat, but that was similar to the rest of the industry. In June, however, as redemption pressure ticked back up, managed futures flows were again near flat, slightly positive given reported data thus far. A closer look shows that while redemptions continue for many, some outperformers are enjoying positive investor sentiment. The ten funds with the largest inflows in June produced average gains of +12.6% last year and have mostly performed well relative to many this year. Just when we were about to finish an otherwise overwhelming negative report on the state of the industry, we catch a glimmer of good news…but is that really good news?