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Assets Continue to Flow into Domestic Hedge Funds

As 2021 comes to a close, investors remain focused on the increased inflation pressures as the Federal Reserve Bank has been forced to phase out their stimulus measures much earlier than originally planned.  Covid cases are back on the rise, but society continues to adjust and respond as we’ve learned to live and cope with this new normal.

Within the alternative investment universe, one of the biggest developments since late 2020 has been the increase in interest for hedge fund strategies.  According to Preqin data, Q3 marked the fifth consecutive quarter of positive hedge fund flows.  This continues to reverse a trend of nine straight quarters of net outflows that stretched from early 2018 to mid-2020 as depicted in the chart.

 

In recent months we’ve been highlighting the pronounced difference this year for hedge fund strategies, and we expect this trend to continue with the Fed about to reduce its stimulus spending.  We believe volatility will remain elevated as the markets digest the reduced stimulus and continue to normalize around actual earnings and cash flows. We remain in a market where valuations have caused trepidation but trying to time any type of correction is a losing proposition.  Accordingly, we believe investors are looking for more hedged opportunities while staying invested. Investor appetite for US managers was significantly stronger than any other region in Q3.  While US/North American managers saw about 40% outflows, the rest of the world saw much steeper withdrawals with Asian redemptions at 50% of flows and Europe/Rest of the World at 67% + outflows.

We’ve seen similar demand for US managers on our own platform, with more interest in low beta multi-strategy funds.  In addition, long biased strategies that combine their public stock positions with late stage private equity investments are becoming more popular.  With investors realizing that inflation is likely to remain more elevated in the near term, investing in longer hedge fund duration strategies that can utilize a private equity component could help generate better returns. This allocation, along with more market neutral exposures, can help mitigate some of the market volatility we would expect to see in the coming year.

In addition to the mentioned hedge fund strategies, real estate remains of interest for 2022 as strategies with a floating income component will likely continue to draw interest in a high inflationary environment. Conversely, rates still remain near historic lows even contrary to the inflation pressures, so we continue to focus on alternative income to help investors solve for yield.  In this challenging valuation and rate environment, a broadly diversified allocation to hedge fund strategies and private investments can help enhance returns and mitigate risk.

For more information on PPB’s alternative fund platform, please contact Frank Burke, CFA, CAIA, Chief Investment Officer, PPB Capital Partners, 484.278.4017 Ext. 108 or at fab@ppbadvisors.com.

Download: PPB – December 2021 Market Blog

Important Footnotes and Disclosures

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The statements included in this material may constitute “forward-looking statements” and are subject to a number of significant risks and uncertainties. Some of these forward-looking statements can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “should”, “seeks”, “approximately”, “intends”, “plans”, “estimates”, or “anticipates”, or the negative thereof or other variations thereof or other variations thereon or comparable terminology. Due to these various risks and uncertainties, actual events or results of the actual performance of an investment may differ materially from those reflected or contemplated in such forward-looking statements and no assurances can be given with respect thereto.  Hedge Funds are Private entities and are not required to file with Preqin. The data given in this document is composed of all data that has been filed with Preqin but is not composed of every Hedge Fund.

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