China-focused hedge funds had a terrible 2016 in terms of both performance and asset flows and are unlikely to see demand return soon, according to research firm eVestment.

Investors pulled $17 billion from Asia (including Japan) strategies last year, leaving their estimated assets under management standing at $95.2 billion. As a percentage of AUM, this was by far the biggest outflow of any region in 2016, said eVestment.

Close to half of the redemptions – nearly $8 billion – were from China funds (see table below), leaving around $19 billion in estimated AUM in such strategies. Most of the money came out of directional equity funds.

Estimated China hedge fund flows in 2016 ($ millions)

Jan Feb Mar Apr May Jun
+146.23 -182.25 -2,139.95 -671.55 -880.39 -878.72
Jul Aug Sep Oct Nov Dec
-1,178.96 -495.30 +124.58 -1,800.24 +53.67 -50.01

The main driver of the withdrawals was poor performance, said Peter Laurelli, head of research at eVestment. China strategies posted losses of -5.82% last year, according to eVestment, and -4.46% by Eurekahedge figures.

That came on top of a big performance drop of -19.7% in the middle of 2015, as Chinese stocks tanked in June onwards. That left investors uneasy about exposure to mainland equities, said Laurelli. The Shanghai Composite Index fell 12.3% in 2016, putting it among the worst-performing stock benchmarks globally last year.

And the past few months have done little to attract investors back to mainland strategies, Laurelli told AsianInvestor, with returns down 4.8% in the fourth quarter, falling 3.1% in December alone.

“So I don’t expect there to be a strong desire to increase long-biased China equity exposure, which is the primary asset base of China-focused funds,” he noted.

Global negative sentiment

Negative sentiment is not restricted to China, however. There were outflows across the board for almost all strategies worldwide last year, with the only categories seeing inflows being commodities ($11.48 billion) and managed futures ($10.32 billion), according to eVestment.

Redemptions overall were largely the result of poor returns in 2015, Laurelli told AsianInvestor. “What we saw in 2016 was an overall negative flow driven by the previous year’s performance and a lack of portfolio allocations into hedge fund strategies,” he said.

“Unless you have institutions saying they will shift from a 7% to a 10% hedge fund allocation, you won’t have a wave of money coming in like you did from 2010 to 2015,” added Laurelli. “And based on surveys eVestment has conducted, we don’t expect to see that happen in 2017.

"Institutions are generally expected to keep their hedge fund allocations flat," he noted, “so we’re missing the one key thing that would cause lots of capital to come in.”

However, he does expect some of the stronger performers from the past year, such as certain large macro funds in Asia, to attract decent flows in 2017. He declined to name the strategies in question.

Trump impact?

Is uncertainty over the policies of the incoming US administration under Donald Trump affecting Asia hedge fund flows? Laurelli does not think so.

“So far any effect has been minimal for emerging market and Asia fund flows,” he noted. “Flows for China were largely being driven by volatile returns – which was obviously happening long before it seemed likely that Trump might win.”

In fact, some in the industry have argued that hedge funds' nimbleness make them a good bet given the current high level of uncertainty, but many institutions remain wary of the asset class, as reported by AsianInvestor.