16/11/2011 Author: Will Wainewright

Towards year-end

As December approaches, managers are waiting to see if 2011’s rocky performance will translate into mass investor withdrawals, and will hope that, in light of wider market uncertainty, hedge funds have proved their worth as a tool for diversification.

As 2011 nears its conclusion, 12 months that many hedge fund managers and investors will be glad to see the back of, attention is turning swiftly to the capital flows data. Hopes are not high. After a tough year, in which the average fund is down 3.5% YTD according to Hedge Fund Research (HFR), many funds are wary of investors losing patience and re-allocating away from the asset class.

A source at a top-five admin firm told HFMWeek that he would be “surprised” if there were not net outflows in the fourth quarter. “I can’t help but think that in the current market environment there will be outflows,” said the source. “We are in an industry where a high percentage of assets are held by a small number of firms. When the biggest firms start reporting outflows it is a good sign that the industry is losing money. But it won’t be on the level of 2008.”

That worse-case scenario, which saw the industry haemorrhage net assets worth more than $150bn three years ago, looks likely to be avoided. Investors have stuck with hedge funds despite poor performance, adding a net total of $8.7bn in the last quarter. But allocation decisions made after August and September’s heavy losses may not be so kind. September data released by Societe Generale showed monthly outflows in the industry amounted to $33bn, which may be a harbinger of things to come.

Luke Ellis, head of Man Group’s $14.5bn multi-manager offering, predicted last month that the fourth quarter would see net outflows as investors, unnerved by this year’s poor performance, sought alternative havens. “There will be a lot of people feeling uncomfortable about performance over the last six months,” he said. “A lot of people are trying to work out what to do for year-end.”

There are reasons to be hopeful, however. Inflows into hedge funds were slightly higher than outflows in November among GlobeOp’s clients, according to the administrator’s monthly capital movement index. Flows were 2.05% net positive, with the admin’s CEO Hans Hufschmid pointing out that redemptions stood at their lowest year-on-year level for November since the firm started recording data in 2006.  

A source at an investment consultant in regular contact with different pension plans points out that a lot of corporate pensions still have money left in their alternatives allocation to deploy. “They may have been waiting for markets and conditions to cool, but unless it is invested by the end of the year it goes back into the pot and they may not get to spend it next year.” And cash, the source points out, is no longer regarded by funds as such a safe haven given its negligible returns and the counterparty risks in the banking sector.

These factors could mean a welcome tranche of late inflows. But the majority of investment calls will have been made already with most investors, working to three-month redemption timelines, having decided at the end of September. Yet Ken Heinz, president of HFR, isn’t convinced that the industry’s heavy losses during late summer will automatically mean Q4 outflows.

“The volatility of the equity markets and general uncertainty means nothing can be taken for granted,” he told HFMWeek. “Circumstances have been changing so rapidly in equities and fixed-income – from one day to the next – that investors are realising they need as diversified a portfolio as possible.”

He added: “August and September may have been poor months, but this doesn’t automatically mean there will be outflows as who knows how investors will react in such uncertain conditions?” That is the great unknown. But with the forthcoming capital movement figures sure to set the tone for the start of the year, all funds will hope investors have kept faith with the industry.