The decline of Equity hedge fund market share in the post-crisis period has been driven in large part by investor allocations to non-Equity strategies. Since 2010, non-Equity strategies have received $212 billion in inflows compared to $71 billion for Equity strategies. When looking at the various Equity hedge fund sub-strategies, Long-Short is the only sub-strategy that experienced net outflows since 2010.
We reviewed performance in order to understand why certain Equity hedge fund sub-strategies saw inflows versus outflows. It is important to draw a distinction between returns driven by beta (the portion of returns attributed to broader market movements) and returns driven by alpha (the portion of returns attributed to manager skill, as opposed to broader market movements).
We see stronger inflows into sub-strategies that generated the most alpha since 2010, as opposed to the sub-strategies that have the highest total returns. This is consistent with what we hear from investors regarding their willingness to pay fees for alpha and preference not to pay for beta. The lack of flows to Sector Focused HFs despite its positive alpha was surprising, though based on another of our recent reports, Go with the Flows: Global hedge fund industry outlook, this may improve in the near future due to strong investor interest at the start of 2018.