eVestment: February Hedge Fund Inflows Make for Cautious Optimism

Industry’s total assets under management at highest level since July 2015.

Hedge fund flows turned positive in February, with investors allocating a net $7.9 billion to the industry, following five months of net outflows. Hedge fund flows are now positive for the year-to-date, according to eVestment. The industry’s total assets under management is now at $3.085 trillion, the highest it’s been since July 2015.

The January to February period is typically one that defines the industry outlook for the year in terms of industry flows. In the six-year period of 2010 through 2015, January and February typically made up at least 30% of the industry’s total annual net inflows. “While it is good that sentiment toward the industry is more positive than negative now, and inflows are outpacing redemptions, unless 2017 is unlike any of the prior eight years, inflows will not likely be significant,” according to Peter Laurelli, an eVestment vice president. Thus, eVestment is “cautiously optimistic” about the February inflows.

Investors are showing interest in macro strategies, considering that the 10 largest macro strategy funds “significantly outperformed their peers” in 2016. Funds with quantitative strategies are also favored, and quantitative strategies have benefited long equity and short equity funds. In the absence of quantitative strategies, in fact, flows to equity long and equity short funds in February would have actually been negative.

And while “managed futures” strategies have faced pressures from investors seeking to redeem money in 4Q 2016, and also in January 2017, there was a reversal of this trend in February. There were also signs of life in February for “event-driven” funds, with more than two-thirds of them seeing net inflows for the month. Credit strategy funds, which have had a hard time attracting new assets since the middle of 2015, also had inflows for February, a sign of investor optimism about credit market opportunities. “Multi-strategy” funds are also seeing the tide turn in their favor, in terms of inflows.

It seems hedge fund flows in 2017 will depend on the inclination of institutional investors to hike up exposure to hedge funds in their portfolios. This factor had a big impact on hedge fund inflows in the years 2013 through 2015. Another factor that will impact 2017 inflows for hedge funds will be how the industry reacts to the last year’s performance in terms of asset allocation or withdrawal. The latter factor tends generally to have a positive influence.

In terms of regional emerging markets flows, it seems inflows are slightly higher than outflows for Russia-focused funds. Investors seem to be emphasizing a fund’s strategy more than its region of operation. For instance, investors are more interested in macro- and credit-based strategy funds in emerging markets, rather than those with equity-based strategies. While flows into China funds were positive on the whole, this was because flows to credit-based strategies were positive, even though flows to equity-based strategies were negative

And flows to Europe-based hedge funds continue to suffer, and have now been negative for 10 months in a row. In contract, those based in Asia have seen a “mostly positive” performance in the last year. US-based funds have also outdone the European hedge fund offerings. According to Laurelli, “This may be due to a prevalence of exposure to underperforming local markets, or simply world views which are not aligned with how markets have been reacting to global themes. The future, however, may be brighter than the recent past as the universe appears to have turned their aggregate performance issues around in December 2016 through February.” 

By Poonkulali Thangavelu