Hedge Fund Assets Hit Five-Year High of $2.8TR

Investors have poured assets into hedge funds, leading to positive flows for the fifth consecutive month.

(December 19, 2013) — Investor appetite for risk-on strategies has seen record flows into hedge funds, according to data from eVestment and Morningstar.

Flows into hedge funds were positive for a fifth consecutive month in November, according to data from eVestment. New allocations of $15.3 billion brought the five-month total of inflows to $68.5 billion.

The flow data was mirrored by Morningstar’s latest findings, although its data showed the new money was flowing into multi-strategy hedge funds and out of single strategy vehicles.

On aggregate, single-strategy hedge funds experienced net outflows of $1.7 billion in October, with the systematic futures category leading the losses for the second straight month with outflows of $972 million, adding to its growing loss of $9.2 billion for the year through October.

By contrast, multi-strategy hedge funds received net inflows of $976 million. The multi-strategy hedge fund category has raised $1.7 billion since January 2013, driven by increased demand for diversified alternative offerings.

Both Morningstar and eVestment noted investors were piling into equity investment strategies, often at the expense of credit ones.

US equity-based hedge fund strategies profited from favourable economic reports and expectations of a rising US dollar. As an illustration, the Morningstar MSCI North America Hedge Fund Index increased 1.2% for the month, and the Morningstar MSCI Small Cap Hedge Fund Index, which represents small-cap long-short equity strategies, rose 1.9% in November. The Russell 2000 Index, which focusses on small caps, also climbed 4.0%.

European equity-focused hedge funds also increased modestly after the European Central Bank unexpectedly cut interest rates in November. The Morningstar MSCI Europe Hedge Fund Index advanced 1% in November and 10.5% for the year to date.

eVestment also found that equity strategies were more popular—taking the majority of new assets in November, driven by investors seeking alternative exposure to stocks. Allocations to long/short equity funds in November were the largest in more than 50 months, since August 2009.

“The turnaround of investor interest towards equity exposure has been significant, and appears to be at the expense of credit exposure,” the report said.

“In the months from May 2010 to June 2013, investor flows to equity outpaced credit only four times. In the five months since the end-of-taper alarm and ensuing US treasury rate spike, monthly equity flows have outpaced credit three times.”

Having said that, credit strategy assets rose in November, marking a reversal of October’s redemptions, but only at a muted pace. Investors allocated $3.5 billion into the space during the month, significantly below their prior 12-month average inflow of $7.1 billion.

eVestment found emerging market hedge fund flows to be positive again in November, the sixth month of positive flows in the last seven.

But Morningstar’s returns analysis showed emerging market hedge funds had endured a tough end to 2013: its unhedged MSCI Emerging Markets Index declined 1.5%, due to greater exposure to Brazil, Russia, and India, but its analysts believe hedge funds performed far worse.

“Slowing economic growth in emerging markets weighed on hedge funds in November,” AJ D’Asaro, fund analyst at Morningstar, said. “Hedge funds concentrating in emerging markets, especially those focused on Brazil, Russia, India, China, and South Africa, lost more than expected.”

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