Fund Fire – Long/Short Equity Redemptions Balloon to $12B

By Lydia Tomkiw

Long/short equity funds started off the year on a strong note, but redemptions have continued to plague the space that also had big outflows in 2018.

Investors have pulled approximately $11.92 billion from long/short equity funds through April of this year, with nearly $2 billion redeemed in April, according to the latest figures from eVestment. That surpasses the $10.74 billion investors pulled from the long/short equity space in all of 2018. “It has been a rough start to the year for the segment, but it is important to note that it’s not a universal issue,” says Peter Laurelli, eVestment’s global head of research. “There are absolutely strategies in this area gaining new assets. But on an aggregate basis, investors are showing dissatisfaction from last year’s returns.” Investors are looking for managers that have added value over their exposures, and while that has been a minority of managers, they are the ones getting inflows, says Jonathan Feldman, an investment manager in alternative investment strategies at Aberdeen Standard Investments. “In equity long/short specifically, we’ve seen more interest in sector-specific and other more narrowly focused strategies – it could be healthcare or biotech or regional banking. So what we’ve seen is the generalists in the U.S. are less in favor,” he says. Long/short equity funds finished 2018 down 7%, but so far this year have returned nearly 10%, with gains of 1.79% in April, according to eVestment performance figures for April. Institutional investors have taken mixed approaches in recent months when it comes to long/short equity, including adding, rebalancing, and redeeming assets. The $2.3 billion Fort Worth Employees’ Retirement Fund upped its allocation to a long/short fund managed by Iguazu Partners by $5 million, sister publication MandateWire reported last month. The $853 million Oklahoma Municipal Retirement Fund committed $8 million across three long/short managers in March as part of a rebalancing effort, MandateWire reported. But last week, Virginia’s $2.5 billion Educational Employees’ Retirement System of Fairfax County approved a set of recommendations from its consultant Segal Marco Advisors that included eliminating is 4% allocation to long/short hedge funds, MandateWire reported.

• With very different market environments in the fourth quarter of 2018 and the first quarter of 2019, the real test for long/short equity managers is how they have performed over the entire six-month period, says David Frank, CEO and managing partner at hedge fund marketer Stonehaven.   “While it’s been difficult for low net exposure funds to match relative performance with long-only funds 10 years into a bull market, low net exposure funds serve a purpose in allocators’ portfolios,” he said in an email to FundFire. “I don’t think most allocators believe the next 7.5 months of 2019 will look like the first 5.5 months of 2019. Over time, funds with low net exposure will win allocations in portfolios based on consistent alpha production through choppy markets.”

The long/short equity space continues to attract views and searches from investors on eVestment’s platform, Laurelli says. One area that has seen a spike in views is the macro space, where funds saw just over $1 billion in inflows in April after suffering outflows for six out of the seven prior months, according to eVestment. Overall, the hedge fund space has continued to see redemptions this year, with over $18 billion pulled through April. If outflows continue for the rest of the year, it would be first time since 2008-2009 that the industry had back-to-back years of outflows, Laurelli says. For now, assets are continuing to flow to firms that are performing, he adds. “Managers who are doing well hopefully get assets, and managers that aren’t are losing them. And the net effect is a slow trickle out the industry,” he says.