Investors withdrew a net $98 billion from hedge funds in 2019, the largest outflows in three years, but UBS analysts have argued that this does not indicate waning popularity.
Data from U.S. research platform eVestment revealed that outflows in December alone hit $16 billion, while Bloomberg reported that investors last year directed 25% of their alternative investments, those outside of traditional areas such as cash, bonds and stocks, into private equity, up from 18% in 2018.
However, in a note Monday, UBS Global Chief Investment Officer Mark Haefele suggested that outflows from hedge funds only tell half of the story, as total assets under management are actually rising.
"While some investors may have reduced allocations to the asset class overall, hedge fund assets continued to rise amid strong returns, hitting a record high at $3.3 trillion according to the Hedge Fund Research database (HFR)," he said, adding that hedge funds in 2019 returned on average 10.4%, their best year for a decade.
Haefele suggested that while the industry is seeing redemptions, "top-tier" managers are continuing to attract capital, or at least suffer fewer redemptions, with only $8 billion outflows registered in total across managers with AUM over $5 billion compared to $32 billion for managers of between $1 billion and $5 billion AUM.
"Redemptions are largely concentrated in just a few strategies, in particular fundamental value equity hedge managers and multi-strategy macro funds," Haefele said.
"This is potentially a reflection of investors' emphasis on more specialized strategies and the search for a better diversifier with a multi-asset portfolio."
UBS analysts attributed the flow trends not to the popularity of hedge funds waning, but rather to investors' more advanced understanding of how certain strategies can deliver their desired risk and return profile. Haefele anticipated that top managers will likely continue to manage a larger share of assets while underperformers will continue to suffer greater outflows.
"Within the asset class, we continue to recommend low directional managers. These can include: relative value managers, such as those who exploit various arbitrage opportunities; discretionary macro funds that can, for instance, capture carry and exploit shifts in economic policy; and multi-strategy managers," Haefele concluded.