By Peter Laurelli, CFA | eVestment Global Head of Research
Redemptions Continued for Hedge Funds to Begin Q2 2023
April was another month of net outflows for the hedge fund industry, though as is frequently the case there are both negative and positive themes which make up the overall picture.
In terms of continuing themes, the multi-strategy segment remains a leader, while redemptions continue within long/short equity, but it’s where change is happening that defined April’s significance. Within macro and managed futures is where the most short-term change is evident, while within the event driven space a new normal has been steadily unfolding.
The sum of these parts remains aggregate redemption pressure on the hedge fund industry, though it is important to see within the data there are managers and strategies able to raise capital, and many able to produce solid returns for investors.
Investors removed an estimated net $11.57 billion from hedge funds in April. Performance accounted for an increase in assets. The result of both factors was a $8.41 billion increase in assets to an estimated $3.419 trillion.
April data was not encouraging for the industry.
Looking back over several prior April’s data shows net investor flows don’t show a noticeable tendency in terms of direction or volume. What the current month’s data shows is a net outflow that is on the high side, though it was higher in April 2020, and it is also the largest net outflow of 2023, so far. Probably the most interesting point about this April’s aggregate flow data is that it was another month where redemptions were not concentrated among few, but relatively spread across many. To put it simply, April’s data indicated elevated and broad-based redemptions.
Net outflows emerge within managed futures strategies.
Our bullet on managed futures last month contained, “…performance within the group had been supporting investor interest in the exposure, however in recent months returns have been wavering. In November 2022, funds produced their largest asset-weighted losses in several years, but March’s performance data, so far, is lower. How investors will react in coming quarters will be interesting to see not only for the strategy’s general success, but also because managed futures has been one of the only two pillars preventing overall hedge fund flows from being much worse.” The net outflow in April was the strategy’s second largest since May 2020 (Dec 2022), and while net flow is still positive for the year, this segment has not had a non-year end net outflow this large in almost three years.
Multi-strategy funds see assets trickle in.
One of two highlights in April was an uptick in net inflows to multi-strategy managers, the second of the two aforementioned pillars of support for the industry. While there were some elevated net outflows from some funds, these were more than offset by similar sized net inflows and a broader base of net inflows compared to most other strategy segments in April.
It seems like the redemption pressures on weighing aggregate macro net flows is fading.
For most of 2022, our commentary around macro funds was along the lines that while the aggregate flow looks negative, it’s not all that bad within the group. There had been a handful of large products weighing on net flows throughout last year, but there had also been several managers successfully bringing in new capital. After another elevated net outflow in January, we’ve seen monthly net flow be slightly positive over the last three months. What appears to be happening is the redemption pressures on the subset of funds hasn’t been there recently. Does this mean the tide is turning for macro funds? We’ll see.
Equity focused strategies continue to feel redemption pressure.
Long/short equity has been feeling the weight of net outflows for a long time. Event driven funds had been having capital raising success amid LSEq’s net outflows starting mid-2018, but that stopped in June 2022. Since then, both segments have been the primary leaders in net outflows for the industry and there is nothing in the data indicating this trend will stop. Within each group there are managers successfully raising capital, more so within event driven, but the weight of some large redemptions among many large managers is hiding those successes.
Volume of Net Flows
Source: eVestment. Monthly Absolute Net In/Outflow as a % of Prior Period Reported Assets, May 2018 – April 2023