Hedge Fund Industry Asset Flow Report: February 2023

Every year for the last thirteen years, February’s data has indicated net inflows into the industry to start the year. Not just net inflows, February’s data had consistently produced the largest average net inflow of any month of the year.
That was not the case in February 2023. For the first time since 2009, reported data for February indicated investors removed assets from the industry. The good news is it wasn’t a large net outflow like in 2009. Instead, it looks like investors paused on new allocations in some areas, reduced exposures which may have grown too large due to excellent returns in others, but it also looks like the negative sentiment from last year toward certain strategies is just  greater than any net new interest so far.
No matter how you want to frame it, the data for February 2023 makes it hard to imagine that this year will be a net positive one for capital raising around the industry.

February’s Data Indicates a Potentially Difficult Year Ahead for the Industry
Investors removed an estimated net $4.83 billion from hedge funds in February. Performance accounted for a slight  decrease in assets. The result of both factors was a $10.1 billion decrease in assets to an estimated $3.424 trillion.

Key Points:
• February data is unlike any February we’ve seen in a long time.
Every year for the last thirteen years, February’s data has indicated net inflows into the industry. Not just net inflows, February’s data has produced the largest average monthly net inflow of any month. The subtext here is that if February’s data is indicating net outflows this year, then, historically speaking, there is not other month where reported data tends to show meaningful allocations are being made to the industry. Basically, if February’s net flow isn’t positive, then it’s hard to believe net flows for the year will be positive. Is it possible the market environment over the last several months has made investors pause on new allocations? Yes, and the overall volume of net flow for February being so low indicates that is a possibility. Regardless, this start to the year does not inspire confidence in hedge fund capital raising for 2023.

• Multi-strategy funds see net inflows, barely.
Over the past two years, net flow for multi-strategy funds have been a highlight for the industry. This theme continued in January 2023, and while in February the segment again attracted net new assets, it was not a lot. To put it in perspective, February’s data for multi-strategy managers over the prior thirteen years showed average net inflows of over $4 billion. What we saw from the group this February was very light net flows in both directions, even from some of the largest and most recently successful products, but also a couple large net flows in both directions, though far, far fewer than we’ve seen at any point over the last couple of years. It is notable that the five largest redemptions in February came from funds which produced an average return of nearly -4% last year, while the five largest net inflows  went to products that produced an average return of over 15%, and each them produced double-digit positive results.

• Managed futures fund flows were the most notable difference in February.
Managed futures funds have not had the same consistent February net inflows that multi-strategy fund data has shown, but they have had similar levels of success over the last couple of years. This would lead one to think that if investors were maintaining their positive sentiment to the strategy that we’d see net inflows in February’s data. We did see some, but there was also a tick up in net outflows. Unlike in the multi-strategy space, the largest redemptions came  rom large products which performed very well in 2022. It could be the case that relative outperformance from managed futures funds (the ten largest funds outperformed the overall industry by almost 25 percentage points last year) has spurred some investors to remove assets. This is one segment where February’s net outflow is less a cause for concern for the rest of the year.

• Negative flow trends in other strategies continue.
Macro, long/short equity and credit strategies all had net outflows in February. While this is a continuation of trends in place from last year, prior February data for each has indicated at least moderate levels of capital raising success. These segments each have different themes underlying the current negative investor sentiment, and each will be important to monitor for overall industry net flow this year.

Source: eVestment. Monthly Absolute Net In/Outflow as a % of Prior Period Reported Assets, March 2018 – Jan 2023