Liquid alternatives in the first half of 2023: significant outflows despite positive performance

Number of fund concepts on offer remains constant
The number of fund concepts on offer in this segment remains largely unchanged compared to 2022 at 761 (2022: 767). The number of absolute return concepts fell to 261, the lowest figure since the Study began in 2008. By contrast, alternative concepts experienced modest growth to reach the 500 mark once again, with only 2020 boasting more alternative concepts (506) since the start of the Study.

Number of funds stays constant

After EUR 17.56 billion flowed out of the liquid alternatives universe in 2022, outflows had already reached EUR 19.42 billion during the first half of 2023. No liquid alternatives strategies recorded net inflows on an aggregated level in the first six months of the year. Overall, outflows reached EUR 28.86 billion compared to inflows of around EUR 9.44 billion. As in previous analyses, outflows were higher in March and June than in the other months, which suggests investors were reallocating funds. Outflows were relatively balanced when comparing between institutional and retail investors.

All strategies record outflows
(Basis: assets under management by strategy)

Just five strategies make up over 70% of the overall market between them. Alternative Multi Strategies grew by 3.1 percentage points to become the largest individual strategy in the segment. Absolute Return lost considerable market share, shrinking by 4.3 percentage points to be knocked off top spot. Absolute Return Bond also lost market share (-1.0%). Together with Alternative Credit Focus (+2.7%), these two fixed-income strategies account for 25% market share between them. It remains to be seen whether these strategies have created a stable core, as the trend has been moving downward for some time, with both bond strategies collectively making up around 40% of the liquid alternatives asset class as recently as 2020. It is conceivable that funds could start to flow back into these strategies as soon as investors believe there will be no more interest rate hikes.

Fixed-income strategies with just under 25 percent market share once again

Liquid alternatives positioned between equities and bonds in the medium to long term
Liquid alternatives recorded performance of 1.96% in the first half of the year (see “YTD performance” chart) to significantly outperform the broader index for unregulated hedge funds. While these strategies succeeded in keeping pace with government and corporate bonds, they lagged well behind European and international equities. Liquid alternatives outperform the bond markets over one, three and five years. The sharp price decline in the bond markets after the turnaround in interest rates in 2022 is also a significant factor here. Although liquid alternatives had managed to narrow the performance gap to equities in the medium term, this gap has widened significantly once again due to above-average equity performance in the first half of 2023.

Given the current market environment, it is clear that equity exposure is particularly important for performance, while liquid alternatives strategies primarily help to diversify and stabilise portfolios (see also Volatility, page 9). There are many different reasons for the low participation of liquid alternatives in strong equity markets. Many strategies invest in other asset classes besides equities, while implementing hedging components can significantly impact performance in a robust long environment. In addition, many fund managers want to decouple their investments from the wider market to a certain degree to keep their product promise of uncorrelated returns. Overall, the performance of UCITS-compliant hedge funds places them between equities and bonds in the medium term.

Liquid alternatives positioned between equities and bonds in the medium term

The strength of liquid alternatives lies in their ability to reduce the intensity of fluctuations within a portfolio. Over five years, most strategies in this segment succeed in keeping their volatility within a range of 5% to 15% (see chart). Average volatility across the entire segment is 9.62%, and as low as 8.4% excluding the leveraged and thus highly volatile Alternative Equity Leveraged and Alternative Short Bias strategies. Compared to traditional asset classes, volatility in the segment as a whole is close to that of European government and corporate bonds (approximately 6%) and well below the fluctuations recorded by European and international equities (EURO STOXX 19.3% p.a. and MSCI World 17.2% p.a.).

Naturally, leveraged equity strategies - the outliers from this range of moderate volatility - do not have this volatility-lowering effect on the overall portfolio. While Alternative Equity Leveraged suffered heavy losses during the coronavirus crash in particular, it generated above-average returns in the recent robust market environment, which means its volatility is high. The same logic applies to Dedicated Short Bias strategies, except for the fact that these strategies made gains during the coronavirus pandemic and relinquished some of these gains in the current environment of strong performance. There is also a significant spread of volatilities within these strategies, with some funds managing to keep volatility to only around 10% while others report fluctuations exceeding 40%. This reflects the funds’ highly divergent risk profiles. The average volatility across all strategies is around 24%.