Over the past five years, equity long-short hedge funds, a cornerstone of the hedge fund industry, have grappled with significant client withdrawals totaling nearly $150 billion. Investors, disillusioned by these funds’ inability to navigate bull markets effectively or shield against downturns, are increasingly turning away from the strategy.
Equity long-short funds, which traditionally seek to capitalize on stock market fluctuations by both buying promising stocks and shorting underperforming ones, have struggled to adapt to a landscape dominated by central bank interventions. Data from Nasdaq eVestment reveals that these funds have lagged behind the broader US stock market in nine out of the past 10 years, failing to deliver satisfactory returns.
This downturn marks a stark departure from the strategy’s glory days, once synonymous with renowned stockpickers such as Julian Robertson of Tiger Management, Pierre Lagrange of GLG, and John Armitage of Egerton. However, industry insiders note a decline in the number of star performers like Chris Hohn of TCI, leading to a diminished allure for equity long-short funds.
Originally pioneered by Alfred Winslow Jones in 1949 as a means to hedge against market fluctuations, equity long-short strategies thrived during the 1990s bull market and the subsequent dotcom bust. However, the era of central bank bond-buying and low interest rates has posed significant challenges for these funds, causing many to underperform low-cost index tracker funds.
A Financial Times analysis indicates that an investor who allocated $100 to an equity long-short hedge fund a decade ago would now, on average, only have $163, compared to $310 if invested in a Vanguard S&P 500 tracker with dividends reinvested.
High-profile funds have not been immune to the challenges. Several “Tiger cubs,” managers influenced by Robertson’s strategies, including Tiger Global and Maverick Capital, have experienced setbacks, reflecting broader industry trends.
Complaints from long-short managers about the difficulty of shorting weak companies in a low-interest-rate environment have persisted for years. Although a rise in interest rates was expected to breathe new life into the strategy, the sector’s performance remains lackluster, with funds gaining only 6.1% on average compared to the S&P 500’s 26.3% gain last year.
Despite some optimism regarding the potential benefits of rising interest rates for shorting, many investors are losing patience. After 23 consecutive months of outflows, assets in equity long-short funds have declined to $723 billion, below levels seen five years ago.
While some industry insiders remain bullish on the prospects of long-short strategies, others caution against overly optimistic expectations, particularly in a volatile market environment. The fate of equity long-short hedge funds, it seems, hangs in the balance, with the direction likely to be influenced by broader economic trends and central bank policies.
By: Delino Gayweh
Serrari Financial Analyst
February 8, 2024
