Hedge fund redemptions outpaced new investments in October, but performance gains by many large funds left total assets unchanged at $3 trillion, according to a new report from eVestment, published Wednesday.
The $2.9 billion outflow in October was the second consecutive month of negative investor flows, the first time this has happened since mid-2012 during the European sovereign crisis.
According to eVestment, investor sentiment toward equity strategies was negative in September and October following a 14-month positive trend. Equity strategies experienced a combined $6 billion net outflow for the two months, after having taken in $106 billion since June 2013.
Equity strategies produced a negative 0.8% return for the last three months. They are up 1.9% for the year, after returning 15.7% in 2013.
The report said recent volatility was only one reason for October redemptions from equity hedge funds.
The majority of last month’s redemptions came from funds with elevated losses in June and July. Several of these then performed well in October and even in September’s volatile environment, but by then redemption decisions appear to have been solidified.
Given that losses were elevated elsewhere across the hedge fund sector in September and October, redemption pressure may persist for equity strategies into year-end, eVestment said.
The report said investor withdrawals from credit funds surpassed new allocations in October, apparently prompted by a three-month asset-weighted performance decline of 1.7%, which was preceded by one month of flat returns. Credit strategies are up 2% for the year.
Investors redeemed an estimated $2.7 billion from credit strategies in October, the report said.
Not all segments of credit markets suffered net asset losses in October. According to the report, distressed hedge funds enjoyed a $1 billion net inflow, continuing a 10-month streak of positive investor sentiment.
As well, event-driven strategies have yet to feel the same effect on asset flows as long/short equity strategies, despite losses in the last two months. These strategies cannot relax, however, as redemption pressure takes time to build, implying that event-driven funds may also face redemption pressure into year-end.
Managed futures funds experienced their 14th consecutive month of net outflows in October, evidence that investor flows take time to react to near-term performance success, according to the report. Managed futures have returned 3.9% in the last three months and are up 4% year to date.
eVestment said investors were likely looking hard at their exposure to managed futures funds. If these funds are unable to attract new assets when their performance is relatively strong, it said, “then the long-term outlook for the predominantly systematic strategies may be highly negative.”
Macro strategies, which have not enjoyed the same level of recent performance gains as managed futures funds, again suffered redemptions in October, losing $3.4 billion in assets. These strategies produced returns of 0.2% during the last three months, and are up 1.6% for the year.
Multi-strategy funds provided the one bright spot in the October report with $4 billion of inflow. eVestment said multi-strategy funds own the industry’s longest span of positive investor sentiment, 16 months, dating back to June 2013.
“Their success is evidence of institutional investors’ persistent interest in hedge fund exposure,” it said.
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