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

Investors have been withdrawing from UCITS-compliant hedge fund strategies ever since the rapid turnaround in interest rates. Outflows accelerated in the first half of the year compared to 2022, totalling EUR 19.4 billion as of 30 June 2023. Amid a generally positive market environment, this asset class outperformed unregulated hedge funds, remained roughly on a par with bonds and lagged behind equities at 1.96%. The low volatility of this asset class means it is proving its worth as a stabilising portfolio component in the medium term.

The withdrawal of investor capital reinforces a trend that has been evident since 2022, with outflows exceeding the total for the entire previous year (EUR -17.6 billion) in the first half of 2023. As a result, the market volume has fallen by 8% to just under EUR 242 billion. Statistics from the Deutsche Bundesbank show where this withdrawn capital is going. In its latest press release on the acquisition of financial assets, the Bundesbank highlights the “historically high reallocations” to fixed-income investments and bonds during the first quarter. It is clear that the new interest rate environment and economic uncertainty are both influencing current investor behaviour.
“Increased interest rates are currently making liquid alternatives less attractive in the eyes of many investors,” said Ralf Lochmüller, Managing Partner and CEO of Lupus alpha. “At -4.3%, however, institutional volumes have only fallen by half as much as the evaluated segment as a whole. This suggests that institutional investors, in contrast to retail investors, have already largely finished reallocating funds away from regulated hedge fund strategies,” Lochmüller added.

Above-average returns possible with careful manager selection

With an average performance of 1.96%, liquid alternatives were unable to keep pace with the major international equity indices. However, a closer look at individual strategies and funds confirms that investors were able to achieve above-average returns by selecting the best funds. Experience shows that the return differential between funds can be considerable, even within individual strategies. For example, while the Alternative Long/Short Equity strategy generated an average return of 2.2%, the best funds in this group achieved 20%. Careful manager selection can produce extremely good results in this market.