By Peter Laurelli, CFA | eVestment Global Head of Research
It is difficult for anything to grow when some of its largest pieces are not growing and that is why the hedge fund industry ended Q1 with essentially zero growth from net investor flows. Long/short equity and credit strategies are having a very difficult time raising new capital to outpace redemptions and recent performance in an albeit very difficult environment does not appear to be inspiring investors.
The industry ended Q1 2022 in pieces. Some pieces are performing well and generating solid investor interest while some pieces are not. Given that Q1 net flows have historically given a good indication of what to expect for the full year, we should temper our overall expectations for broad industry growth in 2022.
March 2022 flow data was very similar to the last several years of March, but Q1 overall was weak.
In each of the prior four years, net flow to end Q1 has been negative. In 2020, the elevated net outflow was understandable given the onset of the global pandemic and in the other three years, both net outflow and win-rates were in the ballpark of March 2022. This is only to say that a net outflow in March is not uncommon in the recent past, but that doesn’t make it a good thing, especially when only 45% of products had net inflows to end a quarter. Additionally, net flow over Q1 was essentially flat compared to $16 billion of net inflow in Q1 2021. Prior to 2016, net inflows to hedge funds in the first quarter of the year was the norm, except for after the global financial crisis in 2009. In those years of strong Q1’s annual net flow was consistently positive and Q1 accounted for the majority of the annual total in all but one year (2013).
Volume of Net Flows
Source: eVestment. Monthly Absolute Net In/Outflow as a % of Prior Period Reported Assets, Jan 2015 – Mar 2022
Multi-strategy fund net flow was negative to end Q1.
Multi-strategy hedge fund flows were slightly negative to end the first quarter, but with over $8 billion of net inflow in Q1 these products have had the largest net inflows of any strategy, a continuation of a successful 2021. The outflow in March was a result of just over half of reporting products’ data indicating redemptions, though only a handful were significant. Of those with elevated redemptions, a couple underperformed their peers in 2021. On the net inflow side, each of the funds with significant new allocations had performed well not only last year, but also in 2020. The bottom line being that despite a slight net outflow to end Q1, the data does not give any noticeable indication that the good capital raising environment for multi-strategy funds is coming to an end.
Managed futures capital raising success continues.
This is the exact same headline from our prior month’s report, no need to change it if the theme remains the same. There are many positives to touch on. The managed futures segment was one of only two strategies to end Q1 with the majority of products’ data indicating net inflows (event driven). Better yet, it is producing the best aggregate returns across the industry of any major strategy segment. Even better than that, the largest products within the universe are performing better than the rest of the universe, in aggregate. Long story short, these are good times for managed futures products, most importantly for their investors, and they appear to be making the most of it. Perhaps it is the knowledge of the past that makes basking in current managed futures good times difficult, however. Investors have historically been quick to react when performance doesn’t meet expectations and so for managers it is critical to keep communications open and thorough with investors in good times and bad.
Credit strategies continue to remain a weak point among hedge fund flows.
In keeping with the theme of “if it hasn’t changed, don’t change it,” the key points to make about credit fund flows to end Q1 2022 are the same we’ve been highlighting for awhile. Rather than reiterate the details of the difficulties many (but not all) face in this space, we’ll keep it short; Net outflows for credit strategies in Q1 2022 were the largest since Q4 2015.
Long/short equity had the largest strategy-specific net outflows in March and Q1.
With the exception of light net outflows from multi-strategy funds in March, the major net flow themes that were in place for much of 2021 continued right through the end of Q1 2022. Unfortunately for long/short equity, this means another period of strategy-leading net outflows. What seemed like very concentrated redemptions for most of the end of 2020 through mid-2021 from some large, underperforming products has become a broader story within the universe. In March and for all of Q1, nearly 55% of long/short equity funds’ data indicated net outflows. From a performance perspective, despite positive returns to end Q1 the strategy has produced the lowest aggregate returns across all major strategies and some of the largest managers have been hit the hardest in what has admittedly been a very difficult start to the year. Performance-wise, there are some diamonds in the rough and there have been products successful at raising capital this year, but they are clearly in the minority.