By Peter Laurelli, CFA | eVestment Global Head of Research
We noted last month that barring an unprecedented parade of assets out of the hedge fund industry in December, overall net flow appeared on track to be positive in 2021 for the first time since 2017. While the bad news is that there was a parade in December, the good news is it was not unprecedented.
The bottom line is that while December’s parade did significantly minimize the hedge fund industry’s overall 2021 apparent success, this year still goes down as the first year of net inflows since 2017 and second since 2015. It was a good year for the industry, just not as good as it seemed it was going to be.
Only once has December data indicated net inflows to end a year.
Redemptions in December were large, nearly 2x the level of 2020, but nowhere near unprecedented. Since eVestment has been tracking monthly flow data (2009), the only time December data indicated net inflows was 2010 and the value was very small. In the past eleven years, the average net outflow in December (excluding 2010) was around -$18 billion.
This makes December 2021 outflows relatively high on an absolute basis, but as a proportion of industry AUM the value is below average. The bottom line is that while December’s net outflow did significantly minimize the hedge fund industry’s overall 2021 apparent success, this year still goes down as the first year of net inflows since 2017 and second since 2015. It was a good year for the industry, just not as good as it seemed it was going to be.
Multi-strategy fund outflows were large in December, but this was anticipated.
Multi-strategy funds had a great year of capital raising and December’s redemptions do not change that story. Rather, December’s net outflow is the result of an ongoing isolated capital shift within one of the universe’s largest firms. Were that influence to be removed from December’s data, the results would show another month of net inflow for multi-strategy funds. Regardless, the universe led the industry in 2021 with $21 billion of net inflow, its first annual net inflow since 2015.
Macro funds ended 2021 on a surprisingly positive note, but that should not be a surprise.
We made the point earlier that for the industry, net outflows indicated by December data has been the norm in just about every year since 2009, but over the last four years data from the macro space has shown the opposite. Whether there have been full year net inflow (2018) or net out outflow (2019-2021), macro fund data has indicated net inflows to end each of the last four years.
That aside, 2021 likely felt very different depending on which macro firms you looked at. Net flows were pretty concentrated with a small handful of firms accounting for the bulk of redemptions and meaningful capital raises. While we cannot tell whether the assets leaving any one manager went to another, it wouldn’t be surprising if that was at least in part the case.
Investors continue to show a preference for credit exposure away from hedge fund structures.
Fixed income/credit hedge fund strategies had their fourth consecutive year of net outflow in 2021 and its largest in that span. This is in direct contrast to what we’ve seen among traditional fixed income strategies and from private debt strategies, both of which have seen significant interest coinciding with redemptions from these hedge fund strategies.
Volume of Net Flows
Monthly Absolute Net In/Outflow as a % of Prior Period Reported Assets, Jan 2015 – Dec 2021
Managed futures end a great year with isolated redemptions in December.
Raise your hand if you anticipated the managed future space seeing meaningful new allocations in 2021…my hand is not raised. After three consecutive years of elevated redemptions and an extended period of mediocre aggregate returns, the onset of the pandemic appeared to cause a major shift in expectations from these products and those able to perform well in 2020 were major beneficiaries in 2021. Just looking at the products with the ten largest net inflows in 2021, their average return in 2020 was nearly 8%, while those with the ten largest redemptions this year produced an average loss of nearly -5% in 2020.
What does that mean for potential capital raising success in 2022? Well, those ten losing the largest assets produced an average return of just over 2% in 2021 and those who saw the largest inflows this year were up an average of over 10%. Considering the unease around inflation continuing, it would not be surprising to see managed futures success continue into 2022, though this universe tends to be full of surprises.
In the end, 2021 was a tough year for long/short equity managers.
Yes, long/short equity had the largest strategy-level net outflows in the industry in 2021 and yes, a major influence here were large and isolated redemptions from large funds which underperformed last year, but while that was all evident as the year went along, there were clearly managers who were seeing investor interest and it felt like once the wave of isolated redemptions passed the picture would change. That never really happened, though. In the end, those isolated redemptions continued through December and a few other large firms also had a difficult second half of 2021. That aside, success in 2020 was rewarded this year, it just wasn’t broad enough or large enough to offset redemption pressure.