As the global financial market shows increasing vulnerability, AlternativeSoft seeks to evaluate whether investors are using hedge funds as a way to protect their returns in response to the equity, bond and crypto downturns throughout 2022. Hedge funds, since their inception in the late 1940s, have provided a way for investors to achieve returns which are less correlated to the market than traditional investments. It follows, that during equity bear market periods, hedge funds will provide an attractive vehicle for many investors who are seeking to consolidate their returns and avoid the large drawdowns we have witnessed in equities, bonds and cryptos during the first half of 2022.
Indeed, earlier this year AlternativeSoft released an article examining the strong returns generated by CTAs despite the downturn (CTA Hedge Funds: When is the right time to Enter?).
However, we find that the net flow of hedge fund allocations throughout the first half of 2022 has been negative, as investors look to redeem their investments regardless of the strategy in question.In order to analyse hedge allocations, we used AlternativeSoft to track the Net Asset Value (NAV) and Assets Under Management (AUM) time series on over 2,500 funds throughout the first half of 2022.
When analysing inflows and outflows at a country level, we see a global trend of outflows totalling $26.3 billion by the end of May 2022. The US market accounted for more than half of these outflows, with over $15 billion withdrawn throughout this time period.
Figure 1: Top 5 highest hedge fund outflows in H1-2022
Despite investor confidence waning, we did observe some notable exceptions in some regions. Figure 2 shows French hedge funds seeing an inflow of $1.5 billion in the first half of 2022.
Figure 2: The top 5 highest hedge fund inflows in H1-2022
We also see that hedge fund outflows are not confined to any particular strategy. Figure 3 shows that all the strategies recorded outflows throughout the first half of 2022.
Figure 3: Outflows by strategy during H1-2022
Interestingly, the current spike in oil and gas prices caused by the Ukrainian conflict has bolstered the returns of Commodity Trading Advisors (CTAs). Figure 4 shows that CTAs are so far the only hedge fund strategy we measured that achieved a positive return during the first half of 2022. Despite this, CTAs saw the second-highest level of outflows ($5.9 billion) during this time.
Figure 4: Outflows and returns in H1-2022 by strategy
Understanding investors’ moves away from hedge funds in 2022 does indeed seem unusual, given the unique features that hedge funds can deploy to thrive in equity, bond and crypto bear markets. However, there are some potential causes that require further analysis.
Firstly, the hedge fund industry could be suffering the spillover effects of the general market uncertainty we have seen throughout 2022. With rising inflation, interest rates, and the Ukrainian conflict, it’s likely that some investors are seeking to remove capital indiscriminately from all asset classes.
Secondly, it is important to recognise that we are still in the early stages of the downturn. As events unfold, it is still possible that investors turn to hedge funds in the future. This is especially pertinent for investors with capital locked up in illiquid investments such as private equity funds.
Finally, it should be noted that bear markets are not a guarantee for positive hedge fund returns, and there are numerous high-profile examples of hedge funds spectacularly blowing up during crises. Some investors may also be wary of these anecdotes when making allocation decisions. This may also cause investors to look at the positive returns achieved by hedge funds during bear markets more cynically. For example, some investors may question whether the recent CTA outperformance is due to the skill of managers, or whether they benefited, rather fortuitously, from external pressures on the global supply of commodities.
In this article, we used AlternativeSoft to analyse hedge fund inflows and outflows throughout the first half of 2022. We found that investors moved away from hedge funds throughout the first half of 2022, despite the fact that hedge funds possess a unique set of tools to take advantage of bear markets. Whilst there are a few exceptions to this trend, such as the French hedge fund market, it should also be noted that the largest hedge fund market, the US, suffered the largest outflow. Whilst the findings are somewhat surprising, it should be affirmed that this analysis provides only the initial starting point of a full evaluation of hedge fund allocation throughout the entire down-period over the next few years.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=483222.
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N.B. This article does not constitute any professional investment advice or recommendations to buy, sell, or hold any investments or investment products of any kind, and should be treated as more of an illustrative piece for educational purposes.
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