The Morning Brief: Outflows Continue to Mount in July

Say this about the hedge fund industry: It is very meritocratic. When performance is good, assets flow in and everyone makes a lot of money. But now the industry is being reminded about the flip side. Performance is mediocre to lousy, for the most part, and investors have grown unforgiving. This change in attitude is underscored in the latest monthly report from eVestment, which shows that net redemptions amounted to an estimated $25.2 billion in July. This comes on top of the $23.5 billion in redemptions suffered by the industry in June. Altogether, the hedge fund industry has witnessed a net outflow of $55.9 billion for the year-to-date.

“The redemption pressures facing the hedge fund industry in the last two months are reminiscent of the second half of 2011, when in a four-month span investors redeemed an estimated $42 billion,” eVestment pointed out in its July report. As a result, 2016 is shaping up to be the third year on record with net annual outflows and the first since the financial crisis of 2008 and 2009.

Drilling down by strategy, credit and multistrategy funds reached “crisis-like levels in July,” eVestment noted. Altogether, investors yanked a net $10 billion from fixed income/credit funds in July alone and more than $13 billion over the past three months. For the year to date, net redemptions from the strategy have amounted to $28.53 billion, on top of the more than $20 billion in net redemptions recorded in 2015.

Multistrategy funds suffered $10.4 billion in net redemptions in July, $13.84 billion over the past three months and $11 billion for the year-to-date. However, last year they enjoyed a $51 billion net inflow of assets.

On the other hand, investors continue to embrace commodities funds, which added $2.7 billion in July. Altogether, commodities funds have pulled in $8.75 billion for the year.

“Investor redemptions from the industry continue to be driven by mediocre performance,” eVestment noted, stressing that the primary source of outflows are the funds producing losses in 2015. “Additionally, in both June and July, redemptions have accelerated from within funds producing losses in 2016,” the report added. For example, funds reporting the ten largest outflows in July have lost, on average, 4.1 percent during the year-to-date.

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Keith Meister’s Corvex Management detailed its proxy fight plans in a letter to shareholders of pipeline company The Williams Companies. Meister nominated an alternative slate of ten Corvex employees as directors ahead of the recently revised deadline of August 25. Meister said in the letter that his slate will act as placeholder nominees and are not intended to become permanent directors. Rather, they satisfy the August 25 deadlines, giving the New York activist hedge fund more time to select its slate of long-term directors. He hopes to identify new independent director candidates over the next several weeks.

Meister explained that if the hedge fund firm’s employees are elected to the board at the upcoming annual meeting, they will immediately add the individuals selected by Corvex to the board and then resign. Meister had been a director of Williams for 18 months, but in June resigned along with five others. In the filing, Meister also pointed out that Williams rebuffed overtures about a possible transaction brought by rival Enterprise Products Partners. In July, Energy Transfer Equity officially called off its high-profile, acrimonious merger with Williams.

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Credit Suisse placed Pioneer Natural Resources on its U.S. Focus list, maintaining its Outperform rating and $212 target price. The bank calls the oil fracker “one of the best growth stories” in the large-cap exploration and production sector, “with a deep inventory of high rate-of-return projects in the Midland Basin.” If you recall, this is the “Mother Fracker” stock that Greenlight Capital’s David Einhorn singled out as a short at the May 2015 Sohn Investment Conference in New York.

“The company continues to push capital and operating costs lower, while increased completion intensity holds the promise of delivering improving recoveries and returns,” Credit Suisse adds in a note to clients. The stock is up about 44 percent this year alone, despite slipping nearly 1 percent on Wednesday, making it a big loss for Greenlight if it’s still shorting the stock. The hedge fund firm did not indicate having closed out the position in its second-quarter letter.

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Two of Credit Suisse Group’s Hong Kong-based managing directors plan to leave and start their own firm and launch a macro hedge fund, according to Bloomberg, citing people familiar with the matter. The individuals are Lucas Kiely, Credit Suisse’s head of cross-market trading, and Charles Firth, Asia Pacific head of equity structuring. Their new fund plans to use derivatives to trade.

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