A world where animal spirits are running wild is also one that has temporarily divorced from fundamentals. Experience tells us this often doesn’t end well.Â
The wealth transfer from Baby Boomers to their offspring, which is in full swing, has got the taxman’s full attention, especially as it pertains to capital gains payments, trust structures and potential breaches of the Tax Act’s Division 7A.
Global outflows hit hedge funds despite good relative returns
Total global hedge fund capital fell below US$3.0 trillion (A$4.32 trillion) in the March quarter for the first time since 2016, as financial market volatility surged on uncertainty and increased risks driven by the global coronavirus pandemic, according to the latest global report by Hedge Fund Research of the US. Outflows of US$33 billion (A$47.5 billion) represented the fourth-largest outflow since the HFR was established in 1992. The other three were during the global financial crisis.
The HFR Global Hedge Fund Industry Report says, however, that not all hedge fund strategies suffered net outflows. An estimated combined US$1.5 billion of inflows were allocated to event-driven distressed and credit arbitrage funds, while equity hedge quantitative directional strategies saw inflows of US$3.2 billion.
Outflows by firm size were concentrated in the industry’s largest firms, with an estimated US$20.6 billion in capital redeemed from firms managing greater than US$5 billion. Firms managing between US$1 billion-$5 billion experienced outflows of US$11.0 billion, while investors redeemed US$1.6 billion firms managing less than $1 billion.
From a proportional perspective, due the industry’s growth over the past 11-12 years, the outflows do not seem so bad, the HFR points out. The 1 per cent redemption in the March quarter was much lower than the nearly 9 per cent of industry capital redeemed in the December quarter of 2008. Roughly 16 per cent of the industry’s capital was redeemed in the one-year period over 2008-09.
Coupled with an overall decline in the HFR Composite Index performance to minus 7.0 per cent in the March quarter, overall asset losses totalled US$333 billion, which was just over 10 per cent of all hedge fund assets. Meantime, the Dow Jones Industrial Average fell 23.2 per cent and the Russell 2000 Index fell 30.9 per cent over the same period. An outflow among macro strategies was the despite the fact that they led the industry’s performance rankings. The HFR Macro Currency Index was up 5.1 per cent with its returns for the March quarter.
Kenneth Heinz, HFR president and  said: “Investors reacted to the unprecedented surge in volatility and uncertainty driven by the global coronavirus pandemic with a historic collapse in investor risk tolerance and the largest capital redemption from the hedge fund industry since post-financial crisis.
“While volatility and market dynamics remain fluid through early in the second quarter, dislocations created by indiscriminate selling from traditional asset management have created significant opportunities for specialised long/short funds, which are likely to benefit both forward-looking funds and institutional investors in coming quarters,” he said.
– G.B
