Growth in Absolute Return Products Reflects Some Retail Interest in Hedge Fund Strategies

There is further evidence this week that absolute return funds are finding increasing acceptance. Lipper has written about sales of the products (in combination with total return funds) in the first quarter, and the trends suggest some good growth.  


Assets Under Management (in €bns. lhs) and Numbers of Absolute Return
and Total Return Funds (rhs)

In the first quarter, they attracted net inflows of €9.7bn compared to €11bn during the whole of last year. According to Lipper, for investors, the attraction of the funds has been boosted by a combination of low interest rates, economic uncertainty and stock market volatility. “Among product providers, hedge fund managers see absolute return funds as an opportunity to move into the mainstream mutual fund market, though figures show that the most successful funds are from fund managers with a foot in both camps,” states Lipper.

As a group absolute return funds aim to achieve positive returns in all market conditions, but they can have different types of exposure in order to achieve it. They invest through a variety of investment strategies in domestic equity or bond markets, or sectors such as commodities, while others have a global spread and hold a broad range of assets. It is particularly noteworthy that absolute return bond funds sold particularly well during the first quarter as investors sought out higher yields. Indeed seven of the best-selling absolute return funds in the first quarter were bond funds.


The popularity of bond absolute return funds suggests that these are retail and/or distributor/advisor products. The top selling products were from, in order, Standard Life, Julius Baer, UBI Pramerica, JPMorgan, Schroder, and in aggregate the largest asset managers in absolute return and total return funds are shown in the table below:

Top Five Groups by Assets in Absolute Return/ Total Return Products
as at End March 2010

The names that have cropped up each have strong branding, and excellent distribution capability, providing supporting evidence that these are retail products rather than products that are invested in by institutions. This point is reinforced by the fact that the UK and Italy together make up 40% of the sales by end market – territories with strong IFA and bank networks for distribution, respectively.

Some absolute return funds are described as Newcits, principally those launched by hedge fund managers. Lipper suggest that more than half of European hedge fund managers have launched, or are planning to launch a Newcits product. Given that the market is for retail products, the sales represent a new end-market for hedge fund groups and therefore represent incremental business. The power of branding in retail channels would itself reinforce the concentration in the hedge fund business – the bigger funds taking an increasing share of the industry through time.

One Step Beyond for Lipper on Hedge Funds

We are well used to output from Thomson Reuters reporting on factual stories on the hedge fund industry. Through the Lipper subsidiary they are going a step further. Up to this point Global Head of Hedge Fund Research Aureliano Gentilini has published research looking backwards. He has gone from exhaustive analysis on dispersions of hedge fund returns and returns by strategy to something altogether less certain – forecasting.

What he has produced is the kind of output you see from funds of funds managers as they describe the macro environment and how it may suit/hurt the returns from the various hedge fund strategies.

Here are some edited extracts from Lipper Hedge Funds Insight Report, “Hedge Funds Outlook”, May 2010

Selected hedge fund strategies are expected to successfully navigate current market turmoil as the risk/return profile of hedge fund managers remains intact

􀁠 The global macro-scenario, macro-information flow arrival, and volatility clustering are expected to continue dominating market sentiment in the short run.

􀁠 In the current trading environment macro and systematic traders are expected to benefit the most from trading across diverse asset classes.

􀁠 Looking at the recent past, historical patterns occurring in 2007 might materialize again. Several macro-driven "crowded trades" are about to appear again in hedge portfolios.

􀁠 Concerns about absorption of new government bond issuance of PIIGS countries and low bid-to-cover ratios at government debt auctions will affect the intermediate-to-long sector of the yield curve in those countries.

􀁠 The Dedicated Short-Bias strategy will be a bright spot as market fears resume. The ten-day exponential moving average of the CBOE Equity Put/Call Ratio—a gauge of the sentiment of speculative traders, which hit a multi-year record low of 0.472 on April 15—appears to be close to a reversal to the downside.

􀁠 FX strategies will continue offering attractive opportunities to lock in profits in the short term. Of interest is the change in positioning that large speculators executed in the euro foreign exchange futures markets in the week ending May 18.

􀁠 In the current market scenario gold and the U.S. dollar are expected to again trend higher in tandem, with the precious metal trending to record highs after a temporary pause.

Chart of The Week - Increasing Significance of Chinese Growth

I haven’t posted a chart of the week for some months. It has to be very telling; it has to be important.

This graphic qualifies on both counts:

Monthly change since January in real retail sales (in January 2007, US$ bn)

Source: Goldman Sachs Global ECS Research


What does it show? Over the period of the recent downturn in global economies, the loss of US real retail sales through recession was about the same in absolute Dollars as the gain in retail sales in absolute Dollars in China.



If ever there was a way of capturing the increased global significance of Chinese economic growth this is it. Chinese growth is so large that it rivals in absolute dollars the significance of the United States in changes in marginal contributions to real global growth, at least as far as the consumer is concerned.


Of course we already had on board that China’s growth in commodity consumption can overwhelm the significance of that of the rest of the world. But it is not just through industrialisation that China is making it’s impact.

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Rate of Inflows to Hedge Fund Industry Fail to Accelerate in 2010

TrimTabs Investment Research and BarclayHedge reported that the hedge fund industry posted an estimated inflow of $7.6 billion, or 0.5% of assets, in March 2010.  The firms estimate that hedge fund assets stand at a 16-month high of $1.64 trillion. Hedge fund third-party marketers have not seen much of these flows - they say that they have seen subscriptions static or even slightly lower than at the end of last year.

It could be that these statements are not incompatible: much of the net inflows to date have been to large well-established funds who do not feel the need to use 3PMs. The external marketers will see their share of flows when the scale of flows pick up further, and when industry flows broaden out across the strategies, and broaden across the maturity and scale range seen in the industry.

In terms of strategies in receipt of these flows the trends of last year have continued: Event Driven funds have done best, having had an inflow in March equivalent to 1.5% of assets, on the back of industry leading returns of 6.6% in the first four months of the year. The largest outflows from an investment strategy in March 2010 were from the Multi-Strategy Funds – a strategy that had net outflows through last year.

 
Industry Level Net Flows Per Month

Inflows in November 2009     $18.7bn

Inflows in December 2009      -$3.8bn

Inflows in January 2010           $7.1bn

Inflows in February 2010        $16.6bn

Inflows in March 2010             $7.6bn

Source: TrimTabs Investment Research and BarclayHedge


 
The flows at the industry level are unlikely to pick up in the next few months given the gyrations in the markets for traditional assets. Collective memory of falling markets is still strong at this point, only just over a year on from the market lows. The level of traded equity volatility has doubled in the last few weeks, and price levels in FX, commodities, equities and bonds have shifted quickly enough that the perceptions are that the markets are trading more emotionally. This is not the background against which most institutional investors can devote senior management time to making active decisions about allocations to hedge fund strategies, and still less about allocations to individual hedge fund managers.