Survey results also suggest a nuanced picture of investor sentiment and preferences based around whether a strategy relatively outperformed or underperformed expectations. While there are some strategies where the relative performance seems to correlate strongly with investor sentiment, the majority of strategies do not seem to correlate due to various reasons. Tail Risk and Volatility Arbitrage strategies, for example, outperformed relative to expectations, but investors are less likely to allocate due to the nature of these strategies fulfilling an insurance-like role in portfolios, as opposed to generating significant returns. Distressed Credit, Merger Arbitrage and Structured Credit strategies seem to be in favor despite their relative underperformance, as investors look to tactically allocate to these strategies as they hope to capitalize on the dislocation in the market.
While considerable uncertainty remains due to the ongoing COVID-19 pandemic, hedge funds have thus far limited their downside capture relatively effectively. Investor sentiment has turned more defensive in the current environment, which will have downward pressure on industry flows for the near-term, but unlikely to lead to a material exodus of capital from the industry. While we were expecting marginal positive flows for 2020 at the end of 2019, it is now more likely that there will be outflows ranging from $50-100bn. Certain strategies, however, will likely see increased interest as investors adapt and redeploy capital based on where they see opportunities.