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Hedge Fund Assets Declined in October, Largest Drop in 13 Months

Date: Thursday, November 22, 2012
Author: Peter Laurelli, HedgeFund.net

Investors flinched on credit exposure, managed futures funds faced month of reckoning, while institutional flows & alts share trends

  • Total estimated hedge fund assets under management declined by $29.5 billion in October, the largest drop since September 2011. The decline was driven both by performance losses and investor redemptions, and ends the industryís three month trend of asset growth.
  • Investors redeemed an estimated $17.7 billion from hedge funds in October, nearly erasing the estimated $17.8 billion of net inflows in Q3. Most exposures and strategies had redemptions with multi-strategy and volatility funds among the few exceptions.
  • October marked the first month since January that credit funds, as a group, had net redemptions. It has been nearly three years since the last time credit funds had elevated redemptions that were not preceded by a performance decline, and is an indication of concern surrounding the long positive run these funds have experienced.
  • Investors reduced exposure to macro, managed futures and commodity funds in October, the first time in eleven months all three groups experienced redemptions at the same time. Managed futures funds had the highest outflows as investors appear to have reacted to the groupís underperformance in 2012, capped by Octoberís large losses and inability to produce gains from volatile commodity and currency markets.

Increasingly, institutional investors compare alternative and traditional asset managers across areas where exposures may be parallel. Comparing flow data across both groups can provide insight into global investor trends and provide a strong macro signal on investor sentiment. Following are trends through Q3 2012 for both traditional and hedge fund flows.
  • Investors interest in equity exposure continued to decline in Q3. That the trend persisted across hedge funds and traditional institutional accounts, and through each quarter of 2012, is strong evidence the institutional investment community is concerned with the state of global growth.
  • Flows out of equities had been landing in fixed income and credit strategies (FIC), at least prior to October. Between traditional institutional accounts and estimated hedge fund flows, investors have added more than $200 billion to the FIC space, with the majority of assets coming at the expense of equity focused funds.
  • Emerging markets appears to be where the similarities across hedge funds and traditional institutional account flows end, and points to a primary area where the lines are most blurred between the two groups. Institutional investors appear to desire emerging market exposure, even EM equity exposure, but the preference is to increasingly get it from traditional institutional accounts.

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