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L/S equity performance decelerated in June but was robust enough for a +10% H1

Thursday, July 29, 2021
Opalesque Industry Update - L/S equity hedge funds lost momentum in June as performance gains decelerated and flows took a dramatic swing into negative territory. HFM's L/SEquity Composite returned 0.8% last month, above the 0.4% June gain for HFM's Global Composite Index, but below each of the L/S equity index's five monthly returns in 2021.

YTD, the strategy is up 11.6% versus 9.1% for the wider industry. The strategy's declaration is evident among the sector's top performers. The top-performing Billion Dollar Club (BDC) L/S equity fund over 12 months has returned over 200% through June largely from gains made during Q1's GameStop "reddit revolution".

And early data for June flows suggests investors believe conditions have shifted out of L/S equity's favour. Afterthe strategy saw inflows of $22bn in 2020, compared to a $21bn outflow for all hedge funds, there has been a course correction in 2021 with investors shifting towards non-equity strategies as the efficacy and rollout of vaccines became more established across developed economies.

Even so, flows into L/S equity funds through May had been relatively robust, with allocators adding $27bn. But in June, much of that progress was lost, with HFM data suggesting L/S equity funds saw net outflows of $17bn as part of a wider industry net outflow of $24bn.

In May, an HFM survey of allocators found that 31% planned to increase their exposure to L/S equity, compared to 27% six months ago. But anecdotal evidence suggests sentiment may have since shifted, with investors concerned about the threat of the Delta variant to the proposed reopening of economies and the prospect of further variants inflicting significant social and economic damage, and there is scepticism that L/S equity is a good strategy for capital protection. As a result, the prospect of renewed inflows will depend more on the trajectory of the pandemic than individual fund performance.

CTA performance turned negative in June but still produced a near-term record half

The average CTA finished with an H1 performance of 7.0% despite a -0.7% return in June; a result that had it trailing the wider HFM Global Composite YTD through June (9.1%) but comfortably ahead of the HFM Managed Futures Index in H1 2020 (1.5%). Recent performance has given investors encouragement, with HFM data showing a robust inflow during H1 and HFM research suggesting managed futures investor searches will rise during H2.

Investor flows into managed futures were effectively flat in June when the wider industry experienced a net outflow of over $20bn. But YTD through June, investors have allocated over $11bn to managed futures funds, accounting for around a third of total net inflows to the hedge fund industry, demonstrating managed futures strategies' appeal to investors as inflation takes off. In 2020, CTAs experienced a net outflow of roughly $3bn, and a net outflow of $13bn in 2019.

The encouraging flow numbers for 2021 have come as the strategy's H1 performance lagged the HFM Global Composite (7.0% versus 9.1%) and the S&P 500 benchmark (14.4%). This suggests hedge fund investors see the strategy as having delivered robust gains relative tomarket conditions. Thus far in 2021, only L/S equity, event-driven and multi-strategy hedge funds have outperformed managed futures funds.

Indeed, notable recent CTA investor searches cited the strategy's ability to produce uncorrelated returns and perform well as we enter a new market phase during which investors take a more "risk-off" approach. In a recent investor survey conducted by HFM in association with the Alternative Investment Management Association, managed futures strategies saw the biggest rise for any hedge fund strategy in the proportion of investors saying they planned to increase their allocation to the strategy versus six months ago, reinforcing a picture of growing confidence and rising allocations.

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