Over $100 Billion Redeemed From Hedge Funds In 2016 As Only 32% Outperform Their Benchmark
By Tyler Durden
Two months ago, when looking at the monthly Evestment hedge fund fund flow report, we reported that investors had redeemed a net $14.2 billion from the industry in October, the fourth consecutive month of redemptions, bringing Year-to-date HF outflows to a net $77 billion removed from the industry. The breadth of redemption pressure in October was the industry’s largest in 2016 with 61% of reporting funds estimated to have net outflow during the month. Two months later it has only gotten worse, but before we get into the details, here is a quick summary of just why, courtesy of JPMorgan.
As JPM’s equity strategist explains in a note summarizing active manager performance, 2016 was one of the most challenging years for active equity managers with only 32% of fundamental and quantitative funds outperforming their benchmarks. JPM estimates that large cap U.S. fundamental managers underperformed by a median 33 bp before fees, with Value managers outperforming (+0.77 bp vs. benchmark) and Growth managers underperforming (-79 bp vs. benchmark).
In more bad news for the buyside, JPM notes that even though (or perhaps because) the market finished up more than 9%, US equity funds saw net ~$50 billion outflows in 2016 and a record rotation from Active to Passive. Investors pulled ~$200 billion from active US equity funds. This is the single largest annual rotation out of active management. Meanwhile, passive equity funds (including ETFs) captured ~$150 billion of inflows.
- Bond funds saw $118 billion inflows in 2016 as equity funds saw $43 billion in outflows (driven by redemptions from active equity funds).
- Active equity funds lost a cumulative $198 billion in 2016 outflows as passive equity funds received $153 billion of inflows.
Meanwhile, as the chart on the left shows, gund flows highlight significant post-election rotation. The global search for yield in 2016 drove large bond fund inflows funded by equity outflows, though this trend reversed after the U.S. election. Since the election, equity funds have seen $52 billion in inflows, and bond funds $10 billion in outflows. Reflation-linked sectors saw the largest inflows while Healthcare and Discretionary experienced the largest outflows.
Still, this “rotaton” has failed to help active managers, as ETFs continue to gain market share. ETFs as a percent of US market cap grew 14% in 2016, with domestic equity ETFs currently at $1.5 trillion AUM. Within the ETF space, Smart Beta products continue to gain strong market share. Smart Beta ETFs currently represent ~$440 billion in AUM, up from ~$300 billion a year ago
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So what about just hedge funds? For the answer we go back to the latest reported by Evestment, in which we find that if the above mentioned October was bad, December was, in their own words, “a fitting end to a difficult year for the industry. While the level of outflows during the month was on par with prior years (an average of $18 billion removed over the last five Decembers) it marked the sixth month of outflows …read more
Source: Over $100 Billion Redeemed From Hedge Funds In 2016 As Only 32% Outperform Their Benchmark
