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Alternative UCITS Get the Flows in Europe!

There has been much discussion over the recent weeks on the outflows suffered by the hedge fund industry. Several data providers estimated the decline in global hedge fund capital in the first quarter of 2016 at about USD 15bn.

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Yet, in front of that, strong inflows into alternative UCITS in Europe have gone somewhat unnoticed. According to Morningstar, alternative UCITS experienced net inflows of EUR 3.6 billion in March, bringing the cumulated figure to EUR 7.7 billion in Q1-16 (based on the universe of funds available for sale in Europe).

The strong appetite for alternative UCITS is also in stark contrast with the outflows experienced by traditional asset classes: in Q1-16, equity mutual funds experienced outflows of EUR 20bn and fixed income & credit funds saw outflows near EUR 13bn. Meanwhile, money market and diversified funds also suffered outflows. Conversely, alternative UCITS is the only asset class experiencing inflows in Europe during the first quarter.

The reasons for such appetite are multiple. On the one hand, the market environment has deteriorated over the last twelve months. European equities suffered a double digit drawdown with annualized volatility in excess of 20%, while Euro area sovereign bonds also experienced higher volatility than usual. On the other hand, the outlook for traditional assets is clouded by many uncertainties: valuations across asset classes are rich, economic and earnings growth face dim prospects and a huge share of risk-free assets in the eurozone are yielding less than 0%... In this context, investors have piled into alternative strategies that offer higher risk adjusted returns in relative terms.

With regards to recent performance, the Lyxor hedge fund index is down 0.4% during the last week of April, and down 0.9% in April. Fixed income and credit arbitrage outperformed while CTAs underperformed as a result of the rise in bond yields.

Lyxor Research May 2016

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