Hedge Funds See Second Month of Asset Outflows

There have been expectations the hedge fund industry would face redemption pressures given volatility and reports of some large losses across the industry. eVestment’s October 2014 Hedge Fund Asset Flows Report shows small redemptions in October, the second consecutive month of hedge fund asset outflows. Hedge fund AUM is still above the $3 trillion mark, but the rest of the year could be a challenge for the industry.

Some highlights from the report include:

1) Investor redemptions from hedge funds in October outpaced new allocations for the second consecutive month resulting in a slight net outflow of $2.9 billion (only 0.10% of AUM). The industry has not had two consecutive months of outflow since the wake of the 2012 edition of the European sovereign crisis.

2) Investor sentiment towards equity-focused hedge funds was negative for the second consecutive month in October, confirming a deviation from the positive trend which had been in place the preceding 14 months. October redemptions appear more related to elevated losses in June and July, rather than due to recent volatility. The implication being that with elevated losses across the universe in September, redemption pressures for equity strategies may persist into year-end.

3) After three consecutive months of negative asset-weighted performance, preceded by one month of nearly flat returns, investor flows for credit strategies turned negative in October. The universe had not produced three consecutive months of negative asset-weighted returns since the 2008 financial crisis, though losses in mid-2011 during the onset of Europe’s difficulties were greater than the universe’s current drawdown.

4) Investors are not shying away from all segments of credit markets. Distressed fund flows were positive in October continuing a streak of positive of investor sentiment which has persisted for 10 months.

5) Event driven funds, which had elevated losses in the last two months, had slightly positive flows in October, evidence that near-term performance does not necessarily drive short-term flows. However, similar to what long/short equity funds have experienced in the last two months, event driven strategies may face redemption pressure into year end.

6) Despite recent positive performance, managed futures funds continue to face redemption pressures, further evidence that investor flows do not react immediately to near-term success.

7) In spite of the two consecutive months of asset outflows, hedge fund assets remain above $3 trillion, a milestone eVestment reported the industry crossed in May of this year. According to eVestment’s latest report, industry AUM stands at approximately $3.019 trillion.

For a free download of the latest report, please click here.