Investment consulting and financial advisory firm, eVestment, released its Hedge Fund Industry Asset Flow Report for Q1, which draws parallels between today’s COVID-19 crisis and the global financial crisis (GFC) of 2008. Overall, the report finds that although there are similarities, early indications are that the hedge fund industry is weathering the current storm better than it did the previous one.
“The dust has nowhere near settled for the COVID-19 crisis, but hedge fund data is beginning to tell the story of how the industry may emerge,” the report states. “If the global financial crisis of 2008 is a benchmark, then for many, at the very least from an operational sense, the current crisis does not appear to be nearly as severe, at least not yet.”
Noting that the industry has changed significantly since 2008, eVestment points out that the underlying investor base today is invested directly with managers at an exponentially higher rate (compared to the prevalence of funds-of-funds over a decade ago), and is more institutionalised.
It notes, however, that this does not necessarily mean the industry is immune to large redemption pressures, although it is more prepared to deal with a crisis than in 2008. Additionally, relative performance from the industry compared with long-only equities and some real assets segments may push relative weighting of hedge funds lower than targets in institutional portfolios. However this continues to play out, the report notes, data so far indicates the industry is persevering, though absolutely not unscathed.
Amongst the highlights noted, is that investor flows flipped to negative in March as an estimated $24.1 billion was redeemed during the month, with outlfows offsetting January-February allocations, shifting YTD flows to negative $8 billion. Additionally, performance dropped total industry assets below $3 trillion for the first time since April 2014. Redemptions, the report notes, were heaviest from within large macro funds and most widespread across the managed futures universe. Multi-strategy funds saw elevated redemptions, although performance dispersion will likely dictate future flows, it adds.
“What is most apparent is that the flows in March likely do not encapsulate the full extent of the impact of this current crisis,” notes eVestment. “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.”
This is a different industry and a different reaction from that of 2008, the firm notes. “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.”
Managed Futures had the most widespread redemptions in March, the firm notes. 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,” says eVestment. “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 report notes the average return in Q1 2020 among the 10 products with the largest outflows in March was -7.5% vs -0.49% for the 10 receiving the most new allocation in March.
Macro redemptions were less widespread, but still prevalent and significant, it adds. 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, it says, noting however, that here were some large redemptions within the space impacting some firms far more than others.
FX/currency performance was down -1.14% in March, although for the quarter, it is up 1.17%. In 2019 as a whole, the sector was up 1.84%.
Meanwhile, long/short equity flows were not as negative as anticipated. “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,” eVestment suggests. “Whichever ends up being the case for individual managers, the group as a whole has faired 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.”
Varying returns within the multi-strategy space in March will likely influence flows in months to come, it adds, noting that about 63% of multi-strategy managers appeared to have redemptions in March, which is just about in-line with the norm for the industry during the month. “Even in the near-term, it appears some underperforming large managers have seen elevated redemptions,” it says. “At the same time, however, there have been several prominent managers producing relatively good returns in this difficult period. Similar to within the macro segment, February and March produced an environment for distinction and we expect this will have a direct impact on flows within the universe.”
Asia-domiciled manager data is not yet indicating elevated outflow, it adds. “There have absolutely been redemptions from Asia-domiciled managers in recent months, but flows in March do not appear to have the extremes seen from within some US and Europe-domiciled managers. It will be interesting to see if this continues or if it’s due to a lag in the data.”