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Investor Appetite for Long/Short Equity Strong Despite Challenging Year for Hedge Fund Performance

by Joseph Lee

  • 04 Dec 2014
  • HF

According to Preqin’s Hedge Fund Analyst, the overall hedge fund benchmark generated 2.99% for October 2014 YTD compared to 9.61% for the same period last year. Despite relatively meagre performance so far this year, this has not appeared to deter many investors from targeting hedge funds employing long/short equity strategies over the course of the next 12 months. Preqin’s Hedge Fund Spotlight - November 2014 states that 48% of investor searches initiated in October 2014 included a long/short equity component, accounting for the largest proportion of strategy searches for the month. Preqin’s Hedge Fund Investor Profiles online service includes detailed information on current fund searches and open mandates issued by institutional investors worldwide. Here, we take a look at investors looking to make hedge fund investments over the next 12 months with a particular appetite for long/short equity. 

The chart above shows the breakdown of hedge fund searches with a long/short equity component, issued by investor type. Private wealth firms (family offices and wealth managers) account for 42% of investors looking to target long/short equity strategies over the next 12 months (excluding fund of hedge funds managers). This is despite the fact that they account for approximately 13% of all fund searches across all strategies and investor types, which suggests that there is a large appetite for the strategy among this type of investor. Long/short equity funds are also sought by asset managers, which make up 17% of investors looking to invest in the strategy, followed by endowment plans and public pension funds, which make up 8% each. Meanwhile, 51% of fund of hedge funds managers looking to make new investments over the coming year will look to invest in funds targeting long/short equity strategies, suggesting that multi-managers are also seeking opportunities in this space. In terms of location, the largest proportion of investors looking to invest in long/short equity funds are based in North America (45%), followed by investors based in Europe (37%).

Investors recently announcing investments in long/short equity funds include Colorado Fire and Police Pension Association (CFPPA). The $4.2bn public pension fund has committed $42mn to a long/short equity hedge fund managed by Hitchwood Capital Management. CFPPA has a 10% allocation specifically for long/short equity funds, with a combined allocation of 25% of total assets towards the hedge fund space.

One of the most recognisable hedge fund strategies, long/short equity, looks set to see an increase in capital inflows from institutional investors over the next 12 months. The strategy benchmark has generated 5.30% net return over the past 12 months as of October 2014, showing evidence of long/short equity funds’ ability to generate positive returns against market volatility. This is reflected by investors’ appetite for the strategy, as Preqin data reveals there is a substantial proportion of investors seeking investments in hedge funds with a long/short equity component in the coming 12 months. Private wealth investors are the leading investor type looking for long/short equity opportunities in the coming year. Likewise, among fund of hedge funds investors, there appears to be a substantial proportion seeking long/short equity opportunities.

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