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Hedge Fund Redemptions Seen Picking Up Steam in October

CTAs Caught on the Back Foot During October Rally, Lose Assets for the Fifth Consecutive Month


October redemptions from hedge funds outpaced subscriptions by -$52.97 billion, resulting in a -1.12% contraction of industry assets, according to the Barclay Fund Flow Indicator published by BarclayHedge, a division of Backstop Solutions.

A $71.03 billion trading profit during the month brought total hedge fund industry assets to more than $4.74 trillion as October ended.

“The fact that the hedge fund industry has outperformed so many other investment markets in this difficult year shouldn’t be overlooked,” said Ben Crawford, Head of Research at BarclayHedge. “We postulate that this fact has kept outflows from becoming an avalanche as investors have become progressively twitchier throughout 2022. As for the acceleration we’re seeing in net outflows now, a major contributing factor must surely be the posture of the Fed. With the yield on 3-month T-bills approaching 4%, it shouldn’t be surprising to see an uptick in rebalancing. After all, even a modest positive return must look massively alluring to investors who have been stomaching losses all year long—even when those losses were of the ‘outperforming’ variety.”

Despite an overwhelmingly profitable month of trading, all but one hedge fund subsector suffered net redemptions in October. Emerging Markets – Latin America represented the only aberration, attracting $1.09 billion in net new capital.

Proportionally speaking, the hardest hit subsectors in October were Emerging Markets- Asia, Global Macro-, Event Driven-, and Fixed Income funds. Emerging Market managers in Asia were waylaid by both trading losses and investor flight. All told -$6.86 billion in investor capital had fled, reducing the subsector’s assets by 4.55%. Global Macro programs booked in excess of $2.27 billion in October trading profits, but the gains weren’t enough to stem -$3.20 billion worth of net redemptions on the month. Total subsector AUM sagged by -1.65% under the weight of the outflows. The story was similar amongst Event Driven managers: October training profits topped $5.30 billion, but were swamped by investors headed for the exits. Net redemptions totaled -$4.05 billion for a reduction in subsector AUM worth -1.61%. Net outflows for Fixed Income hedge fund managers was proportionally similar (-1.57%), but due to the subsector’s large relative size, the total outflow figure was much higher at -$13.88 billion.

The managed futures industry suffered a fifth consecutive month of net redemption activity with -$4.21 billion in outflows (-1.04% of assets). The string of losses dates back to June 2022 and has cost the managed futures industry a combined -$17.68 billion in capital.

As in the prior four months, the four CTA subsectors tracked were once again evenly split between those enjoying net inflows and those suffering net redemptions. Discretionary and Multi-Advisor Future Funds both picked up new investment capital (+1.13% and +1.20%, respectively) while Systematic- and Hybrid-CTAs lost investor capital (-1.21% and -0.73%, respectively). In the end, Systematic CTAs, by far the largest subsector, tipped the industry balance for the month with -$4.38 billion in net outflows.

12-Month Flow Trends

For the 12 months through October, the hedge fund industry recorded $257.86 billion in redemptions. A $531.59 billion trading loss over the period brought total industry assets to the $4.74 trillion figure as October ended, up from $4.71 trillion in September and up from $4.68 trillion a year earlier.

Merger Arbitrage funds remain the nominal 12-month flow leader through October, adding $9.62 billion (+10.31% of assets). Convertible Arbitrage funds, however, take the ribbon for the largest relative growth, having amassed an impressive +15.30% swelling of their assets, picking up a combined $5.13 billion over the trailing twelve-month period. Other investor-darlings included Multi-Strategy funds, which attracted new capital number $7.43 billion, fattening their coffers by +1.53%. Option Strategies funds brought in $1.23 billion (+2.49% of assets) and Emerging Market – Latin American funds reported $783.61 million in inflows for an increase of +7.58% in the subsector’s assets.

Subsectors with the largest 12-month outflows were unhappily led by Fixed Income funds, which have suffered a combined -$111.55 billion net loss of capital over the prior twelve months. This accounts for a total asset shrinkage of -11.07% for the sub-sector. The second-largest nominal loss was reported by Balanced (Stocks & Bonds) funds with -$27.89 billion in outflows (-4.06% of assets). Equity Long Bias funds weren’t far behind with -$26.01 billion exiting (-6.87% of assets). The Emerging Market- Global subsector has been slapped with -$23.46 billion in net outflows that leaves them, proportionally speaking, the worst hit subsector among hedge funds with an asset contraction of -11.14%. Global Macro funds have shed -$17.93 billion or -8.85% of assets, and Equity Long/Short funds are lighter by -$17.24 billion in net redemptions (-10.11% of assets). Over the 12-month period through October, managed futures experienced $11.75 billion in redemptions, 3.30% of industry assets. A $43.90 billion trading profit over the period contributed to $398.01 billion in total industry assets, up from $346.14 billion a year earlier.

Over the trailing twelve-month interval, Systematic CTAs were the only subsector showing net redemptions at October’s end. The Systematic subsector remained buried deep by redemption pressures with an aggregate investor flight of -$18.69 billion (-5.75% of assets). On the other side of the ledger, Discretionary CTAs picked up a combined $6.57 billion in net subscriptions for a total increase of their assets of +37.28%. Multi Advisor Futures Funds have brought in $3.65 billion to swell their assets by +28.91%. Hybrid CTAs are also up, albeit in more modest terms. They’ve picked up $297.09 million in net subscriptions (+1.53% of assets).

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Malea Lydon

BackBay Communications