Tuesday, January 31, 2023

What’s happening to hedge fund flows?


  • Industry on track for fifth redemptions year in seven: HFR
  • Diversification drive at risk of being outweighed by liquidity needs
  • Recent outflows reported by Citco, SS&C GlobeOp

The industry is set for its fifth year of outflows in seven, according to Hedge Fund Research, after net redemptions hit $33.7bn in the first three quarters.

If fourth-quarter flows are in line with the rest of the year, the hedge fund sector could see its heaviest redemptions since 2016, when they totalled $70.1bn.

That suggests a rush for the exits by some clients, perhaps driven by some of the weaker performance in equity strategies.

Yet investor sentiment suggests a desire for liquidity may be a more important factor, as allocators look to switch up their portfolios to prepare for an inflationary environment.

Managers have been preparing for this. “We expect some volatility in flows in the near term, as clients access liquidity and rebalance their portfolios due to market movements,” said Luke Ellis, Man Group CEO, in the summer.

Some Man Group clients “found themselves with significant margin calls from FX” in H1 and faced “capital calls from private market managers, taking them overweight their target in alternatives,” said Ellis.

Hedge funds may have faced more such calls during the UK pension industry’s recent liability-driven investment (LDI) crisis.

Liquid hedge funds faced “cashpoint risk” during the 2008 crisis, so this is not a new issue for the industry — and helps explain why some of the bigger dominant players have renegotiated longer long-ups with clients.

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Much of the current flows data is negative, but not overwhelmingly so. Man Group reported inflows to its alternatives products in Q3, and outflows from long-only.

SS&C GlobeOp put forward redemptions at 2.7% in September, in line with all-time lows.

“Investors largely maintain their allocations to hedge funds in the face of strong financial market headwinds,” said Bill Stone, CEO of SS&C Technologies.

But its capital movement index was -1% this month, indicating net outflows, compared to a 0.1% gain a year ago, which could mark the start of a new trend.

The fund administrator Citco tracked redemptions of $21.7bn in September, double the $11.2bn in subscriptions, and suggesting a net outflow of $10.5bn among clients.

Equity-based strategies and multi-strategy hedge funds had the biggest outflows, with net redemptions worth $5bn and $4.3bn, respectively.

However, global macro ($0.1bn) and hybrid funds ($1.7bn) had net inflows. “Future trade dates are currently showing the pattern of withdrawals continuing,” Citco said in its report.

Against all this, investor sentiment towards hedge funds is relatively positive, certainly in contrast to recent years. A Preqin survey marked them as more popular with investors than other alternatives earlier this year.

UK private bank Kleinwort Hambros hailed its holding of hedge funds as “an amazing diversifier” this year, and they are not alone.

While CTA and macro funds have dominated performance headlines, even a flat long-short equity position has value to an investor in the worst year for the typical 60/40 portfolio in almost a century.

Whether the drive amongst investors for diversification is reflected in better flows data next year remains to be seen.