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Net hedge fund inflows returned in October as assets rose to all-time high

Friday, December 03, 2021
Opalesque Industry Update - Investors added an estimated net $7.22 billion into hedge funds in October, increasing 2021 net inflow to $34.33 billion. Asset-weighted returns were positive resulting in overall industry AUM increasing to $3.64 trillion, said eVestment.

On the surface, October's data painted a pretty good picture of hedge fund industry health, but we have reasons to temper any excitement. It is true that net inflows in October are not the norm and the breadth of products with inflows was also decent, but there has been a slowdown in the breadth of products getting meaningful new allocations for a fifth consecutive month.

Fortunately, the proportion losing large pieces of their AUM is also on the low-side, which has resulted in the overall volume of net asset movement remaining low.

Net inflows in October are not the norm. One would have to go back to October 2010 to find the last October where there were any meaningful net inflows and in the span from then to now, there were only two other positive Octobers (2013 & 2014, which had combined net inflows less than half of October 2021).

The breadth of products with inflows was also decent, 53% of reporting managers' data indicated net inflows, but the breadth of products getting meaningful new allocations (>2% of AUM) has now been relatively low now for a fifth consecutive month. Fortunately, the proportion losing large pieces of their AUM is also on the low-side, which has resulted in the overall volume of net asset movement remaining relatively low.

With an additional $3 billion going into multi-strategy funds in October, net inflows for the year are larger than we've seen for any strategy for a few years. That's the good news. The bad news is all you read about flows having mostly been widely dispersed in 2021 does not apply to the multi-strategy space. This is very much a story of asset concentration.

Less than 45% of reporting multi-strategy managers' data indicates net inflow this year and the average product AUM (not firm AUM, just product size) which has accounted for the bulk of net inflows is almost $9 billion. For these managers 2021 has been an exceptional year so far, but there are absolutely products struggling among these success stories.

The good news continues to flow out of the managed futures universe

The managed futures segment has now seen aggregate net inflows for eight consecutive months, surpassing its previous largest streak of net inflows from 2015.

Large managers have absolutely attracted the bulk of new assets in 2021, but nearly 60% of reporting managers' data indicate net inflows for the year, so success is being widely felt along with the largest funds' success.

For the most part this seems like a win-win year for both managers and investors. The 10 largest reporting funds in this space have outperformed the average of any other strategy's ten largest average returns and only activist managers are producing meaningfully better average returns this year on an overall strategy basis.

With two consecutive months of net inflow, the second being in September which was an otherwise negative month for the industry, it appeared that some of the concentrated redemptions that had been suppressing positive news from this space had been alleviated. It appears that wasn't entirely the case as another wave of concentrated net outflows appeared in October's data.

The size of October's net outflow isn't concerning, however, and there were absolutely products seeing new allocations during the month. If you want a positive spin on October's long/short equity data it is that contrary to the themes we noted in the very first bullet, redemptions here were concentrated which could benefit the broader group if those assets remain within the strategy. That, however, is a big "if".

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