2018 was not a good year for the industry as a whole. There is no disputing the numbers; performance was negative, investor flows were negative, and the industry’s total AUM fell by the most since 2008. The majority of managers lost money for their investors, and the majority of funds saw investors remove more money than they allocated.
Q4 hedge fund letters, conference, scoops etc
Despite these negative headlines, the industry was not devoid of positive themes. 42% of managers were able to raise net new capital during the year. Many of those raising significant amounts of new money produced returns that far outpaced their peers, likely leaving investor sentiment positive.
2018 will go down as a year when investors were again reminded that the industry is not necessarily full of exceptional managers. While over the long-term is how success is ultimately judged, it is in difficult environments that the exceptional managers tend to distinguish themselves, and that is exactly what happened in 2018.
Highlights From This Report
- Investors removed an estimated $19.6 billion from hedge funds in December. Full year outflows over $35
- Despite negative headlines and aggregate figures, there were notable
- Long/short equity outflows accelerated in
- Macro managers finished 2018 on a positive
- Managed futures had outflows to end a very difficult
Hedge Funds End 2018 With Above Average December Outflows
Investors removed an estimated $19.64 billion from hedge funds in December. For the year, net investor flow resulted in aggregate redemptions from the industry of an estimated $35.28 billion. Overall industry assets declined by an estimated $87.7 billion to $3.189 trillion.
Key Points
- 2018 was not a good year for the industry, but it was not universally negative. First, the bad:
Full-year outflows of $35.3 billion were the second highest since 2009, behind the $111.6 billion outflow in 2016. Flows were negative in each of the last four months of 2018, a streak the length of which has not happened since 2011. The industry asset decline of $87.7 billion during the year is by far the largest since 2008. Q4 2018 redemptions of $32.3 billion were the largest since Q4 2016, and in the thirteen quarters since Q3 2015, investor flows have been net positive only four times. In this span, investors have redeemed nearly $146 billion from the industry. - What are some positive takeaways for the industry in 2018?
There were many winners in 2018 - Despite elevated aggregate outflows, still 42% of reporting managers were able to experience net inflows.
Large new allocations made during the year were met with above average returns - Funds which received meaningful net inflows in 2018, outperformed the aggregate industry by over 400 basis points. Universal success should not be expected within this industry - 2018 will go down as a year when investors were again reminded that the industry is not necessarily full of exceptional managers. Over the long-term is how success should be judged, and it is in difficult environments that the exceptional managers tend to distinguish themselves. - Investors redeemed heavily from directional equity exposure in December.
Net outflows for long/short equity funds in December were the largest for the segment since 2009. On a proportional basis (% of AUM), however, redemption pressures were not nearly as bad, though absolutely still elevated. More importantly for the segment is how directly redemptions were related to large performance losses, with a two or three-month lag. This is significant as 2019 gets underway because of the large performance losses in both October and December. - Macro strategies were generally a bright spot for the industry in 2018.
The largest reporting macro managers were able to produce aggregate performance gains in 2018. Despite net outflows in Q4, the group ended the year with inflows in December, which put full year flows firmly positive, and is a good signal of investor interest heading into 2019. - Managed futures strategies were mostly a disappointment in 2018.
Despite weathering difficult market environments well in December, 2018 will be a year managed futures managers, and their investors, will likely want to forget. Many large funds likely did not meet investors’ expectations, and redemptions were large and widespread. Hopefully 2019 will be more like December 2018, and not the other eleven months of the year. - Multi-strategy fund flows point to greater concern about the hedge fund industry.
On the surface, it should have been a better year for many multi-strategy managers. Similar to the macro space, several large multi-strategy managers were able to perform relatively well in 2018, however flows from reporting managers indicate investors have not been satisfied. Specifically, the five multi-strategy managers with the largest 2018 redemptions each produced positive returns in 2018, with an average over 4%. Looking back further, only one of these strategies produced negative returns in either 2016 or 2017. The concern being that if these large multistrategy managers, who generally represent the risk/return profiles generated by the industry as a whole, are unable to retain investor interest, then it is evidence investors are not focused on obtaining industry-like returns. - Fixed income/credit strategies sitting at crossroads.
There are mixed signals coming from funds within these universes. Performance was overall positive (albeit slightly) for the year, but there were more down months than up months in 2018. Flows for the year were also positive, but they ended the year with the second largest monthly outflow, second to the $6.4 billion removed at the end of the prior quarter, making net flows in the second half of the year negative. The group’s larger funds outperformed their peers (mostly) during the year, but there were also asset-weighted losses in each of the last three months of the year, which points to a difficult capital raising environment to start 2019.
December Flows Give Mixed Message for EM Fund Managers
Key Points
- After six consecutive months of aggregate redemptions, investor flow to EM funds was positive in December.
On the surface, this sounds like a good scenario, but it is not nearly as positive as it may seem. Take away one reporting manager, and the group would have had its seventh consecutive month of redemptions. This does not mean flows were universally negative during the month, only that December should be considered another month in which emerging market strategies were generally not in favor with investors, but again there was a pocket of interest. In this instance it was toward exposure to China-related fixed income/credit markets. - European hedge fund market has seen several years of volatile flow trends.
2018 was not a good year for retaining assets for European-domiciled managers. 2017 was a good year, but 2016 was not. 2015 was a good year, and 2014 was not. It is pretty clear that various themes over the last several years have created a turbulent operating environment for European managers. The big question for the group in 2019 will be whether performance headwinds and structural question marks (BREXIT) will prevent another reversal in the direction of flows.
Hedge Fund Performance Tables
Article by eVestment
