Net hedge fund industry flow negative for only third month in 2021

Hedge fund industry flow data for September indicated net outflows to end Q3. That quarter-end data would show outflows is not surprising as it has been the norm across the industry over the last eighteen quarters. On one hand we could dismiss September's outflows for this reason in the face of what has been an otherwise generally good year for capital raising across the industry, but if we dig, we can find some underlying metrics which point to a slowing of this year's inflow momentum that extends beyond just September's data.

Key Points from September Data:

Net outflow in quarter-end months' data is a common theme.
One would have to go back nineteen quarters to find the last time data for a month marking a quarter's end showed net inflows (Q1 2017), and back to 2015 to find a two quarter-ends in a year with net inflows. The point being that while September was a month with net outflows, it has become a common cycle in the data. It is important to point out, however, that both 2015 and 2017 were years of overall net inflows (2016, 2018, 2019 & 2020 had net outflows), so there is something to be said for inflows showing up in quarter-end data. That aside, September net redemptions do not appear to be a sign that an otherwise positive year is about to shift in sentiment.

If we had to find some negative themes behind the data, we could find a couple.
While it has been a generally good year for the industry, we want to make sure we're not ignoring any little signs in the data which are worth noting, and there are a couple. First, the proportion of funds with data indicating net inflows was about 44% in September. This is the same level we saw in June, which is the low level for the year. July was also low (48%), which makes Q3's average monthly win-rate the lowest of the first three quarters. This is a signal the momentum of inflows is slowing. Second, since June, the proportion of funds seeing net inflows greater than 2% of AUM have been bouncing along near 12%, which is well below the first five-months' average of 18%. Lastly, in September we saw the highest concentration of inflows of the year (57% of all flow went into the Top 5th percentile of asset gainers), which just means that of those who did have net inflows in the month, only a small proportion saw meaningful inflows, which is the opposite of what we were seeing in the first half of 2021.

Monthly Absolute Net In/Outflow as a % of Prior Period Reported Assets, Jan 2015 - Sep 2021. Current and past September values in green.

There was a slight hiccup in multi-strategy fund flows in September.
One of the two notable numbers in September were net outflows from multi-strategy funds, only the second monthly net outflow of the year for the group and its largest of the year. Before we start calling this the end of a great stretch, we note that the bulk of the redemptions came from products which have not performed well in 2021 after producing solid results in prior years. For now, we'll call aggregate net outflows from multi-strategy products a hiccup during an otherwise enjoyable meal.

Macro fund flows continue their negative slide.
September's net outflow nearly matched that of March 2021, but what it's more clearly done is put a quarter-end exclamation point on investor's sentiment toward a few of the largest funds in the macro universe and their poor start to 2021. If we're looking for a home for most of the post-May 2021 negative influences, the macro segment is a primary source.

Long/short equity fund flows data continued to improve in September, but here's another hiccup.
The net inflow for long/short equity funds in September, it's third overall net inflows of 2021, was the second notable number form September's data. We have been noting that this segment was performing better on a capital raising basis than its aggregate flow data had been indicating. With a second consecutive month of meaningful inflows, it would appear the weight of concentrated outflows in H1 2021 has been shed. There is a hiccup, however. The segment saw its largest asset-weighted performance losses since the onset of the pandemic in September and some of those funds seeing the bulk of recent inflows produced their largest losses in eighteen months. Recent allocations are extremely rarely at risk in the near-term, rather the point is here is a segment which just appears to be getting over a performance-driven hump and it will be interesting to see down the road how investors react.

(Large) Managed futures funds continue to enjoy a good capital raising environment.
The managed futures segment has now seen aggregate net inflows for seven consecutive months, matching its previous largest streak of net inflows from 2015. Echoing the theme of concentrated allocations in September, fewer than half of reporting managers' data indicated net inflows during the month and looking across the various reporting funds we see the bulk of all net new assets coming in this year have gone to larger managers in the space. The ten largest net inflows so far in 2021, which account for almost 70% of reported data's net inflows, have gone to products with an average AUM near $4 billion. This is also very much a performance story as those ten largest net inflows returned an average near +7.5% last year while the largest net outflows in 2021 were -4.1% on average in 2020.