Long/short equity funds look set to see an increase in capital inflows from institutional investors over the next 12 months. Recent data collected for the 2014 Preqin Global Hedge Fund Report reveals that investor appetite for long/short equity funds will remain strong going into 2014, with 51% of investors indicating that they will be including a long/short component in their fund searches. This is a significant increase on the proportion of investors targeting the strategy from the previous year, when 34% of investors planned to include long/short equity funds in their searches.
The increased demand for long/short equity funds is in part due to the positive investor reaction to the performance of these funds; 59% of investors stated that returns from the strategy had exceeded their expectations in 2013. The strong performance of equity markets enabled long/short funds to perform well in 2013 and long/short equity funds posted 13.47% for the year, surpassing the overall hedge fund benchmark, which posted 11.08%. Long bias and value-orientated funds performed even better, with yearly net returns of 18.20% and 22.62% respectively, taking the overall long/short benchmark to 14.10%.
Positive performance from long/short equity vehicles in 2013, teamed with optimistic investor sentiment towards the fund type means that 2014 looks set to be a lucrative year for managers of long/short funds looking to raise capital. The Fund Searches and Mandates feature on Preqin’s Hedge Fund Investor Profiles online service reveals that 59% of investors which have initiated searches in January 2014 are including a long/short component. Further to this we have already seen some allocations to long/short funds in 2014: Ohio Public Employees’ Retirement System made a $25mn commitment to Lakewood Capital Partners, a hedge fund that exclusively follows long/short equity style strategies. Event driven equities strategies are also likely to benefit from strong net flows in 2014, with global macro strategies remaining common as a result of the diversification benefits they offer investors.
The increase in investor appetite for long/short strategies is certainly good news for managers of these funds looking to raise capital in 2014. However, it could potentially have a detrimental effect on other hedge fund strategies as managers compete for allocations. Managers running strategies, such as fixed income, will be looking to improve performance in 2014 in order to capitalize on the increased optimism among institutional investors in hedge funds.