By Lydia Tomkiw

Long/short equity hedge funds came out of the gates strong, with the segment starting 2019 as the top-performing hedge fund strategy following a disappointing 2018 when it was among the industry’s worst-performing. But despite the strong start, the sector faces several challenges in the year ahead, experts say. Long/short equity funds posted performance gains of nearly 6% in January while the hedge fund industry aggregate overall clocked in at 3.91% — the strongest start to the year for the whole market since 2006, according to data from eVestment. Long/short equity managers rebounded across the board, with 92% reporting positive performance, says Peter Laurelli, eVestment’s global head of research. “It was an environment where missing the boat was hard to do. It was a rebound from the sharp declines at the end of 2018,” he says, noting the rebound last month in global equity markets. Event-driven strategies also started the year off strong following challenges in 2018. Managed futures strategies, which have gained some attention from institutional investors, had the worst start to the year, down nearly 1%, according to eVestment. The strong start to the year for the industry overall follows a difficult 2018 that saw investors redeem nearly $35 billion from the hedge fund industry, with long/short equity funds in particular feeling the hit, as reported. But despite the stronger start, the long/short equity space could face challenges, and more redemptions could still be in the works, from decisions made at the end of last year, says Arvin Soh, portfolio manager at GAM Alternative Investments Solutions. “It is still a space that will be challenged,” he says. “Returns might be better, but in terms of business outlooks, in terms of conversations we are having, that’s not turning around.” A question that remains for the space is, “Can these strategies continue to do well [or will] they see that redemptions have not gone away?” Soh says. Some managers are tilting bets away from long/short strategies. Jana Partners decided to close two of its stock-picking funds last month to dedicate more resources to the firm’s activist activity, as reported. Long/short equity hedge funds have historically captured the most attention from investors and consultants in eVestment’s database. And while hedge funds have attracted a higher proportion of product views compared to other investments to start the year, the number of product profile views in January for long/short equity was below the level seen in 2018, Laurelli noted. Interest has spiked instead for macro strategies.
While some headlines have heralded the demise of stock-picking hedge funds, there will always be strong demand for high-quality ones that are also good at portfolio management, says David Frank, CEO and managing partner of hedge fund marketer Stonehaven.   “It’s hard to find these managers, but the demand for them is high,” he said in an email to FundFire. “Many investors looking at long/short equity right now are focused on Q4 ’18 downside capture vs. Q1 ’19 (to date) upside capture. It provides good insights into beta vs. alpha. Managers getting a lot of attention [are ones that] protected capital in Q4 and are making money in ’19.”