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Investor flows show CTA appeal in Q3 moving into Q4, but faltering long/short funds post losses and lose flows

Friday, October 29, 2021
Opalesque Industry Update - Investor flows show CTA appeal in Q3 moving into Q4: HFM's Managed Futures Index finished Q3 up 7.6% YTD following a -0.3% return in September. The Q3 result leaves it trailing HFM's Global Composite Index by 1.5 percentage points YTD through September, with the wider industry benchmark up at 9.1%. Both indices trail the S&P 500, which is now at 14.7% YTD after September saw the index post a first negative month since January. Despite the September retreat, managed futures' recent performance has given investors plenty of encouragement, with HFM data showing robust inflows into the strategy during Q3 and indicating that increased investor interest could continue into Q4.

Investors turning to CTAs: Preliminary numbers suggest managed futures had as strong a month for inflows as any top-level hedge fund strategy, receiving net $0.8bn, and scored the third largest net inflow for Q3, its $2.6bn gain behind multistrategy and an impressive $8bn+ net inflow for relative value/arbitrage. The wider hedge fund industry experienced a September drawdown of $16.9bn and, as a result, managed futures' $12.8bn YTD net flow now trails only relative value/arbitrage and equity.

Last month's numbers further showed managed futures' appeal to investors as inflation becomes more widespread and, likely, a more permanent feature of the global economy in the mid-term. This stands in contrast to 2019 and 2020 when managed futures net outflows totalled $15.5bn in a low-interest rate, less inflationary environment.

Faltering long/short funds post losses and lose flows

L/S equity hedge funds produced a disappointing September as performance faltered following losses in global equity markets and flows continued into negative territory. HFM's L/S Equity Composite returned -1.1% (dragging HFM's Global Composite Index to -0.4% for the month) and resigned the strategy to a -1.1% decline for Q3. For the year through September, L/S equity funds remain ahead of the wider industry, 10.2% versus 9.1%, but both trail the S&P 500 at 14.7%. Of the 10 top-performing $1bn+ equity hedge funds YTD, only four have posted positive returns in September.

The downward trend for strategy performance was replicated in investor flows, which totalled net -$3.8bn in Q3, L/S equity's first negative quarter of 2021. The strategy's result proved a drag on the wider industry, which still added $3.9bn from investors in Q3. YTD, L/S equity flows remain positive at $15.7bn, but progress has now slipped YoY, the strategy having attracted net $28.7bn in 2020.

And outflows are likely to continue into Q4, with investors switching to non-equity strategies as the wider roll-out of vaccines becomes standard. Despite this, HFM data suggests 56% of L/S equity funds have had positive flows in 2021 so far, compared to 50% across all strategies, and 75% have had positive returns, compared to 74% across all strategies.

Investor sentiment towards L/S equity has shifted from a more positive outlook earlier in the year as allocators grow increasingly concerned about the prospect of Covid-19 variants preventing full reopening and a delay lasting well into 2022. The US debt ceiling is also a factor in any equity investment thesis and the ongoing political wrangling between Congress and the Biden Administration will discourage investment in the short-term due to uncertainty over the impact on interest rates and, most worryingly, inflation.

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