Survey: Inflows Don’t Reflect Performance Differences

Date: Monday, October 17, 2011
Author: Christopher Faille, AllAboutAlpha

A new report on hedge fund inflows indicates that the rate at which money is coming into the hedge fund industry reflects that industry’s improved performance, but that if these figures are segmented by strategy or geography, the different rates at which they are attracting money do not very accurately reflect their different levels of successful performance.

BarclayHedge, the hedge fund data vendor, and TrimTabs Investment Research, a strategy-oriented research firm, announced that hedge funds received their seventh net inflow in eight months in August, bringing their inflow for the first eight months of 2011 to an impressive $51 billion. The figure for August alone is $6.1 billion. Redemptions exceeded inflows in July, but July is thus far the exception in 2011. Looking the big picture, inflow was negative every month from September 2008 through April 2009. But in the 28-month period beginning with May 2009, inflow has been negative only six times.

Sol Waksman, the founder and president of BarclayHedge, attributes recent inflows to the excellence of recent performance.

“While the S&P 500 plunged 10.6% in the four months ended August, the Barclays Hedge Fund Index decreased only 5.6%,” he said. “Additionally, our preliminary data for September reveal that hedge funds outperformed the S&P 500 by more than a 2:1 margin again last month.”

Disconnect

The flows differ with the strategies. Fixed income hedge funds are quite popular. They have posted an inflow in 13 of the last 14 months. Their YTD inflow is $14.6 billion, the heaviest of any of the hedge fund strategies. Fittingly, fixed income hedge funds have been very successful in recent months, returning 3.6 percent in 2011 to date, the best performance by strategy for that period.

Looking beyond that, though, one soon finds disconnects that indicate that investors have not yet adjusted to the realities of post-crisis performance among alternative investments.

Funds of hedge funds have not done as well as the underlying funds, as recipients’ of investors’ assets. They took in only $631 million in August, which is only 0.1 percent of their assets, and that was coming off the negative inflows of both June and July. “While hedge funds have raked in $103.3 billion since the start of 2010, funds of funds have shed $7.1 billion” in that period, the report says.

This is despite the fact that funds of funds have been performing better than hedge funds. Their performance in the four month period beginning May 2011 beat hedge funds by 60 basis points, and beat the S&P 500 by 560 basis points.

Likewise, emerging markets funds show “lopsidedness between flows and returns,” as the report puts it, with an inflow of $8.8 billion in 2011, and a performance that is down 4.9 percent.

When one analyzes results by geography, there is an analogous disconnect. Those domiciled in Canada have produced the best performance of any region BarclayHedge tracks, 16.3 percent in the past year. But Canada has an unimpressive inflow for the same period (6.8 percent), and a negative inflow for August (-2.4 percent).

Continental Europe, which has a far less impressive return over the past twelve months than Canada (2.9 percent), has an inflow of 8.4 percent of assets during that period, and although its inflow too was negative in August, the bleeding was less severe (1.9 percent of assets).

Leverage

What are managers to do with the money with which investors entrust them? Leon Mirochnik, associate portfolio manager of TrimTabs, said: “Hedge fund managers have zero interest in risk at present. They are clinging to the safety of Treasuries and the greenback and stiff-arming stocks.”

Despite their risk aversion, Mirochnik said, it is possible that hedge funds could move into equities in a significant way in the final quarter of this year, especially if they “lever up in an attempt to end the year with a bang.”

TrimTabs and BarclayHedge have surveyed hedge fund managers on several issues, among them this question of leverage for the months ahead. They report that 61 percent of those they surveyed “do not plan to change their leverage position in the near term.” That still leaves 18 percent who plan to deleverage, and 21 percent who plan to lever up.