Update: Approprirately enough, moments ago Bloomberg blasted the following:
- HEDGE FUND OUTFLOWS IN JULY LARGEST SINCE 2009: EVESTMENT
At some point, all these cumulative redemptions will force hedge funds to start selling.
2016 has been another bad year for the hedge funds community in particular, and active managers in general (despite the previously noted rebound in performance since the end of Q2 on the back of short covering and major releveraging). The best representation of this comes courtesy of JPM's Dubravko Lakos-Bujas, who shows that investors have pulled more than $109 billion from active US equity funds YTD. While they are the clear losers in the capital allocation race, the winners are passive equity funds which have captured a whopping $35 billion of inflows, as more and more investors seek to take the simpler, cheaper-managed option (even if it is one which assures their investing career will on day end in tears).
So what is the reason for this ongoing rotation out of more expensive, active managed strategies?
Simple: performance, or lack thereof, no matter how active managers would like to spin it. According to JPM, only 33% of fundamental funds and 26% of quantitative funds are outperforming their benchmarks YTD.
The chart below shows just how much worse active performance has been YTD vs the same period in 2015.
The key pain trades listed by JPM are the following:
Momentum stocks (i.e., 2015 relative outperformers), in particular Growth names, sold off sharply during the first half of the year. Meanwhile Value performance remained muted, netnet resulting in a relatively challenging environment for fundamental funds. Quant funds, by contrast, fared better in the 1H as their performance is more closely tied to Low Vol stocks, which have benefitted from declining bond yields.
So where are we now? Here is JPM's summary of how active managers hope to catch up to their benchmarks:
- Since early July we have seen a significant rotation in stock leadership, away from Low Vol stocks, which have reached record-high valuations and into Value. This unwind of Low Vol likely explains the recent underperformance of Quant funds, while the rotation into Value has helped fundamental investors regain some lost ground, with 52% outperforming their benchmarks in 3QTD.
- Asset managers (incl. mutual funds) positioning—overweight Financials and Healthcare (+1.4% and 1.0% vs. benchmark, respectively), and underweight Low Vol sectors (Staples -1.2%, Telecom -0.4%), see Figure 10. So far YTD, Financials and Healthcare underperformed by -7% and -2%, respectively, while bond proxies have been best performers (Telecom +15.2%, Staples +8.3%), see Figure 4.
- Most notable changes based on the latest 13F filings show mutual funds adding to Energy in 2Q, while hedge funds added to Staples while reducing exposure to Financials and to Healthcare (Pharma/Biotech) in their long book. Pension funds have further added exposure to Real Estate given the challenging yield environment.
- YTD fund flows highlight significant rotation in the market. The global search for yield (negative bond yield in Europe/Japan, near record lows in US) has driven bond fund inflows ($100 billion), largely funded by equity outflows (-$74 billion). Within equities, Dividend and Low Vol ETFs have attracted the largest inflows YTD, while Momentum and Growth ETFs have seen outflows. At the sector level relative to the S&P 500, commodity-linked sectors and bond-proxy utilities saw the largest inflows while Healthcare and Discretionary saw the largest outflows.
As for the passive side, this is where ETF flows have gone:
With that in mind, the active management community has one simple solution how to fix its accelerating outflow headaches: generate more alpha. Good luck.