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Good news for hedge fund flows in Q2 2020

Friday, July 31, 2020
Opalesque Industry Update - Investors redeemed an estimated $16.9 billion from hedge funds in June. The outflow puts Q2 redemptions at $42.4 billion, and YTD redemptions at $55.4 billion. Performance lifted total industry AUM to $3.06 trillion.

June marked the resumption of redemption pressure for the hedge fund industry. Themes familiar to what played out for much of 2019 appear to have re-established themselves, though with negative investor sentiment being felt by many of those who were resilient to it in the recent past.

"If we look closely within various strategies, we find funds performing well, we see data suggesting some are effectively able to raise capital in this environment. Yes, if we look closely, we can find good news amongst the difficulties being faced by many," said eVestment's Global Head of Research Peter Laurelli.

Investors redeemed an estimated $16.9 billion from hedge funds in June. The outflow puts Q2 redemptions at $42.4 billion, and YTD redemptions at $55.4 billion. Performance lifted total industry AUM to $3.06 trillion.

The last time the industry had aggregate inflows in a quarter was Q1 2018. That is nine quarters without new money coming in outpacing money leaving. Some of the industry's largest and long-standing firms are seeing large redemptions. Some of the firms which were leading the way for capital raising last year and into early this year have seen the tides shift. Finding good news within the data is possible, but when you have to hunt for good news, that is usually bad news.

The volume of asset movement appears to be normalizing

As a reminder, the volume of asset movement is the sum of the absolute value of flows in the month divided by the prior month's assets and measures what % of reported assets are "in motion" during the month.

The value has declined and is similar to what has been experienced in June in the past. The value declining would not be filed under "good news," unless it was accompanied by net inflows in the month. All it means is the reactionary nature of flows post-pandemic onset appears to be settling.

The reprieve from redemption pressure macro funds enjoyed in May did not last long. June redemptions put H1 2020 net outflows just over $20 billion. This is not a universal issue, however, if we're looking for a positive spin, rather redemptions are high within a small segment, but they are quite high.

Interestingly, looking at the macro funds which are among those able to raise net new money in 2020, there are several systematic strategies in the group. These products have not necessarily performed better than their macro peers this year, but they almost universally did so last year.

Credit funds saw a jump in redemptions in June

We noted in prior reports there were some meaningful inflows for some credit strategies in April and May, but that interest (it still continued for some) was overtaken by a wave of redemptions to end Q2. Those experiencing the largest outflows were a mix of funds; some focused on securitized markets from MBS to insurance-linked securities, while others have broader mandates under the "alternative credit" umbrella.

It appears that for some, the fallout from losses during the pandemic's onset were a sign to exit, while for others it was an opportunity.

Long/short equity outflows were elevated for a second consecutive month

Actually, flows in this group have been negative for a while, with the exception being February of this year, but there had been some managers posting good returns who were also able to raise meaningful assets both last year and into this year.

That theme changed with the onset of the pandemic. These products produced elevated losses, some of which continued into June, which means redemption pressures here are likely not over.

What do you think?

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