Liquid Alternative Flows Negative in September

While one-year flows into liquid alternatives nearly hit $5 billion, investors pulled assets from the category in September. Outflows from the category reached $711 million during the month with Long/Short Equity and Market Neutral funds leading the way.

Meanwhile, commodity based funds continued to add to their coffers over the month, adding another $973 million in assets. Over the past year, commodity funds have pulled in more than $18 billion in new assets.

Active Long-Only Pain

While liquid alts are seeing outflows that will likely correct themselves after the next market correction, long-only active managers are feeling the pain of continued massive outflows that are likely more permanent. U.S. equity managers are feeling the worst of it with more than $23 billion of outflows over the month and $236 billion over the past year.

The below chart from Morningstar provides a summary of all the major categories across active and passive funds.

Morningstar September 2016 Asset Flows

If asset flows are any indication, investors are clearly feeling that it is time to start shifting away from equity funds and into bond funds – this despite the low yield, and low expected return on bonds over the next several years. Either that, or they are chasing the high returns of bonds year-to-date, as noted in the table below:

Bond category returns 2016

As we know, past returns do not predict future returns, and this is a great example. Don’t expect bond returns like these in 2017!

Liquid Alternative Category Flows

Drilling down a bit deeper, the September flows into (or out of) specific categories are outlined below ($ in millions):

  • Bear Market: +$256
  • Currency: -$154
  • Long/Short Credit: -$153
  • Long/Short Equity: -$551
  • Managed Futures: +$440
  • Market Neutral: -$512
  • Multialternative: +$20
  • Option Writing: -$41
  • Trading Strategies: -$2
  • Volatility: +$159

In addition to the above categories, nonontraditional bond funds lost $1.3 billion during September, continuing their negative trend over the past year. The category has lost more than $28 billion in the past 12-months, largely due to lower returns than anticipated and a near zero rise in interest rates.

Many investors piled into these funds in 2012 – 14 with the expectation that rates would rise and these funds would provide protection from falling bond prices. As we know, the rate rise has yet to materialize.

The full Morningstar report can be found here: Morningstar September Asset Flows