January figures show hedge fund outflows slowing

Low tide

Investors redeemed an estimated net $5.2 billion from hedge funds in January 2017. Total industry assets under management (AUM) sit at $3.033 trillion. Despite evidence of redemption pressures, the level is far better than the industry’s start last year, when investors removed $19.3 billion in January.

Within the aggregate numbers we see positive signs at the fund level. For example, 49% of managers had inflows during the month, solidly above the prior 12-month average. More than 17% of all funds, and over 20% of large funds, had meaningful inflows (more than 2% of AUM), both also well above their prior 12-month averages. Lastly, redemptions were noticeably focused within strategies that lost money in 2016.


The largest redemptions in January were from managed futures funds, though fewer than half of products had outflows. Investors continue to display dissatisfaction with large products that underperformed in 2016. The 10 funds with the largest redemptions have an average AUM of more than $4 billion, and average 2016 returns of –5.1%, while the 10 with the largest inflows had an average AUM of around $900 million, and returned an average of +3.1% last year. 


Commodities had the lowest proportion of managers with outflows to start the year. The segment was one of the few with inflows in 2016, so January’s allocations are a good sign for the new year.


While traditional US fixed-income strategies have seen a recent influx of new assets, fixed-income/credit hedge funds – outside of distressed – have had difficulty attracting net new assets. This is a trend dating back to mid–2015, the end of the US Fed’s QE3 monetary policy, and subsequent extended performance drawdown caused by seven consecutive months of losses among larger funds. Since the second half of 2016, however, performance has been consistently positive across many funds. While there may be an overhang of negative sentiment, it would not be surprising to see that shift to positive this year.


Event-driven funds appear to be suffering a similar sentiment overhang as credit strategies. However, a significant shift to performance gains in H2 2016 may work in this universe’s favour as well. The event-driven funds with the largest outflows in January – all except one of which had net outflows for all of 2016 – returned an average of –0.6% in H1 and +7.6% in H2 2016.


Positive sentiment

After seven consecutive months of redemptions, and a 16-month span with only three monthly inflows and $21 billion removed, macro hedge funds started 2017 with a firm breeze of positive investor sentiment at their backs. While macro strategies have been seemingly maligned by poor returns, the 10 largest reporting products returned an average near 7% in 2016. The segment produced its share of unfortunate high-profile performers in the last two years, but the wide distribution of returns has masked the fact there are many high-profile gems.

Multi-strategy hedge funds have been a good indicator for the industry’s flows over the past few years. The group had significant inflows in 2013–2015, as did the overall industry. A shift of sentiment against a backdrop of poor returns in H2 2015 and early 2016 brought a wave of outflows in H2 2016. Returns in H2 2016 were generally very good, particularly among larger funds, and allocations to begin 2017 are a positive sign for the strategy and the industry overall.


eVestment’s outlook for 2017 flows hinges on two main influences: 

1. Flows from institutional portfolios as a result of portfolio shifts in exposure to hedge funds. This had been a primary driver of inflows in 2013–15, and faded in 2016. 

2. The impact of the prior year’s performance on the withdrawal, allocation, or redistribution of assets around the industry. 

2016’s negative environment was the result of institutional flows being near flat, and prior-year returns being negative. While it is not clear for 2017 if institutional flows will shift to positive, prior-year performance is clearly nowhere near as negative as in 2016. 

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