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COVID-19 crisis shifts hedge fund flows negative in March

Friday, April 24, 2020
Opalesque Industry Update - Investors redeemed an estimated $24.1 billion from hedge funds in March. Outflows offset Jan/Feb allocations shifting YTD flows to negative $8.0 billion, said eVestment.

Large performance losses resulted in total industry AUM falling below $3 trillion for the first time since April 2014.

"Going through fund specific information to understand the severity of flows proved difficult in March. There were products with highly elevated redemptions, and some within the same categories which simply did not appear to experience similar influences at all," said Peter Laurelli, CFA, eVestment Global Head of Research.

"What is most apparent is that the flows in March likely do not encapsulate the full extent of the impact of this current crisis. Rather, it appears some investors reacted in the short-term with hasty redemptions, some likely followed through on planned redemptions, while new allocations slowed significantly," he added.

What is different between now and the global financial crisis onset in 2008 is the underlying investor base in hedge funds has become increasingly institutional, and hence does not move as suddenly as before, it is invested more directly with managers, and there also lacks the presence of a major fraud (Madoff in 2008) exacerbating redemption pressures. This is not meant to diminish the fact that for some March was a very difficult month, but it is worth noting that as an asset class, hedge funds appeared to weather the onset of the COVID-19 crisis relatively well, at least compared to the last major crisis they endured.

Nearly 80% of managed futures funds appeared to have had redemptions in March. While the magnitude of redemptions varied significantly across the universe, it is clear redemptions within this category were the most widespread of all fund strategies. While it may seem counter-intuitive for investors to have redeemed heavily from the segment which has produced the best aggregate returns in a difficult 2020, it appears the heaviest redemptions within the universe came from some products which have not done as well as their peers. For example, the average return in Q1 2020 among the ten products with the largest outflows in March was -7.5% vs. -0.49% for the ten receiving the most new allocation in March.

About 66% of reporting macro managers appear to have had outflows in March. This is below the level of managed futures, but still higher than most other segments. There were, however, some large redemptions within the space impacting some firms far more than others. We noted earlier that between February and March, global markets provided a framework for distinction within this space which could be a catalyst for longer-term success or disappointment. Based on the distribution of redemptions in March by performance, not just within the last couple of months, but looking back at 2019 as well, it is clear investors are reacting to disappointing returns.

It may be the case that potential redemptions related to the current crisis have not yet been pushed through within the long/short equity space, but it may also entirely be the case that some managers within the category may be seen as a source of opportunistic allocations in the wake of the crisis. Whichever ends up being the case for individual managers, the group as a whole has fared relatively well through the crisis, so far. About 55% of reporting managers faced redemptions in March, far below several other categories, and there were some managers receiving meaningful allocations during the month already.

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