Equity Hedge Funds Witness $150 Billion Withdrawal Amid Underperformance

After underperforming for a decade, equity hedge funds see a shift as $150 billion exits, questioning the future of star stockpickers.

Why are investors leaving equity hedge funds?

Over the last five years, equity long-short funds have seen nearly $150 billion in client withdrawals, reflecting a growing disenchantment with their performance during both market highs and lows. These funds, aiming to profit by picking stocks poised for success and betting against those likely to falter, have fallen short of the US stock market's returns in nine of the past ten years. This trend marks a significant departure from the 1990s, when such strategies yielded substantial returns, and illustrious stockpickers like Julian Robertson of Tiger Management and John Armitage of Egerton were in their prime.

Bar Chart
Equity Investor Flows
Source: Nasdaq eVestment

Challenges In Modern Markets

The strategy's decline is attributed to its inability to adapt to a market environment heavily influenced by central bank policies and low interest rates, which has also seen a rise in the popularity of index tracker funds. For instance, an analysis shows that an investment of $100 in an equity long-short hedge fund a decade ago would have grown to only $163, compared to $310 if invested in Vanguard’s S&P 500 tracker. This underperformance has led to significant outflows from some of the most prominent funds, including those managed by former Tiger Management protégés.

Interest Rates And Market Dynamics

Despite a sharp increase in interest rates over the past two years, the anticipated revival of the equity long-short strategy has not materialized. The funds' average gain of 6.1 percent last year pales in comparison to the S&P 500’s 26.3 percent increase. This ongoing struggle has prompted some investors, like Richard Byworth of Syz Capital, to exclude equity long-short funds from their portfolios due to their inability to justify high fees with adequate performance. As a result, the total assets managed by these funds have decreased to $723 billion, with some investors shifting towards multi-manager hedge funds that employ a broader range of strategies.

The Future Of Long-Short Strategies

Despite the current pessimism, some industry participants remain hopeful about the potential for a turnaround, particularly as higher interest rates begin to differentiate between strong and weak companies more clearly. However, this optimism is not universally shared, with concerns that a potential decrease in global interest rates could further impact the viability of long-short strategies. This divergence of views underscores the uncertainty facing equity long-short funds, as they navigate an evolving market landscape where past successes no longer guarantee future performance.

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