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Hedge fund investors lose faith in broad equity rally

A steady flow of cash into 'market neutral' equity funds, which give exposure to a specific group of stocks while remaining neutral on the broader market, has made them one of the most popular hedge fund strategies of 2017, as stocks hold near record highs.

Hedge funds saw total outflows of $2.9 billion in October, after $2.5 billion in September, but the redemptions were more than offset by aggregate returns, taking assets under management to a record high of $3.25 trillion, according to figures from eVestment.

Equity-focused hedge funds led the outflows in October, with just under $3 billion withdrawn, while fixed income and credit funds in contrast pulled in $2.6 billion.

Notably, market neutral equity strategies posted another solid month, with a $2 billion inflow taking year-to-date gains to $9.5 billion.

By primary strategy, only macro funds have outperformed market-neutral equity in 2017, with $12.5 billion of inflows.

The S&P 500 closed above 2,600 for the first time on Nov. 21, at which point the index had not fallen by more than 3% from a previous high point for a record 382 days, and the steady stream of allocations to market-neutral strategies suggests more investors feel the rally does not have much further to run.

However, the eVestment research shows a limited number of funds have been gaining from the trend. In fact, while monthly allocations have been consistently positive since November 2016, some three quarters of market neutral equity strategies have seen net outflows in 2017, the highest proportion of any major industry segment.

"While no month has produced industry-leading inflows, the segment has become one of the new allocation leaders of 2017," said the firm. "The implication is that a small proportion of market neutral strategies are gaining a meaningful amount of new allocations in 2017."

Besides market neutral equity, managed futures and directional credit were the only primary strategies to see material inflows in October, of $2.85 billion and $2.33 billion, respectively.

Directional credit is the third-most popular primary strategy of 2017, with $9.35 billion gained year-to-date.

"Credit strategies continue to gain new assets, mirroring trends among institutional long-only strategies," said eVestment. "Institutional investors clearly have demand for credit exposure, which is a noticeable change from both 2015 and 2016."