The hedgies that dodged the market mayhem; Structural shifts put home bias in the spotlight
Welcome to Asset Allocator, FT Specialist's newsletter for wealth managers, fund selectors and DFMs.
Forwarded this email? Sign up here.
Damage limitation
There have been some high-profile losers from last week's market mayhem. For all the talk, however, hedge funds' struggles were confined to a pretty small part of the market: the average fund reportedly dropped just 0.2 per cent in January.
DFMs own exposures tell a similar story – albeit with one or two sorrier tales. In the Ucits long/short space, the picture remains relatively serene. We reported last month that most these strategies are running relatively limited short books at the moment. That trend seemingly echoes across the whole industry, and might help explain funds held up reasonably well in January.
Of those strategies sitting in the targeted absolute return sector, only Odey Absolute Return sustained a particularly notable loss – some 12.4 per cent – in January. That’s not too surprising: anyone looking at the fund’s returns over the past 12 months won’t be surprised to see another bout of volatility.
Looking at other Ucits strategies, it's clear the vast majority here also made a good fist of things. DFMs don’t hold these funds – strategies like MW Tops, Aspect Diversified Trends, AHFM Defined Returns – in the same volumes that they once did. But returns were respectable on this occasion.
One more recent alternative favourite, NB Uncorrelated Strategies, did suffer a little more, shedding 3.1 per cent on the month. But that's hardly a disastrous figure.
More notable, in light of recent developments, is the 5.4 per cent drop seen at BH Macro. Those losses have continued into February, marking the strategy’s largest drawdown for more than five years. One month might not make a year, but this is particularly bad timing for a company that’s just made an aggressive ultimatum on fees.
Peaks and troughs
Full-year fund flow data from the IA makes for pleasant reading for the investment industry. As we mooted back in October, 2020 turned out to be one of the best years on record for net retail fund sales.
Some £6.2bn in net sales in December meant Q4 flows alone stood at over £17bn – a figure greater than those recorded in four of the last five complete calendar years.
Money placed directly with DFMs had a rather rockier period – the industry saw net outflows for six of the 12 months of the year, with December proving to be the second-worst month of those. As we’ve discussed previously, this is likely a structural shift as clients seek (lower cost) on-platform options.
And there’s more evidence of structural changes elsewhere, too. Some have noted the fact that trackers’ share of the market topped out last year, going from 17.5 per cent to 17.8 per cent across 2020 as a whole. But this was more a function of the roaring trade in active funds.
Separate fund flow data for January from Calastone, for instance, shows a sharp drop in overall sales on the month – after a record-breaking December, inflows were flat in January. Yet index fund flows remained constant at around £500m. Contrary to some expectations, neither market rallies nor market slumps are dislodging the interest in passives.
Other long-term trends include, inevitably, the continued shift towards ESG strategies. But there is one other part of the market over which nagging questions remain. UK growth and UK income funds continued to see sizeable outflows amid both December’s euphoria and January’s indifference. With a Brexit deal in place and optimistic noises being made about value shares, the time is seemingly ripe for that to change. This year will show whether those outflows have indeed been cyclical, or whether investors’ home bias is undergoing a structural shift of its own.
Staying positive
The negative rates debate rumbles on today, courtesy of latest comments from the Bank of England in its quarterly monetary policy report.
As has happened before, the nature of this communication proved slightly opaque: the Bank said it will start preparing so that it could introduce negative rates within six months, but emphasised it doesn’t think such a move is necessary or imminent.
In any case, investors were already beginning to make up their own minds. With hopes of economic recovery rising, the likelihood of the UK going negative was already starting to be priced out prior to today’s comments. The Bank is also pretty positive on the scale of that recovery. Both traders and long-term allocators alike will hope that all the speculation ultimately proves redundant.
