Investors put billions into old-school stockpicking hedge funds. Here's why long-short equity strategies are back in style.

Long-short equity funds experienced a resurgence in investor interest, attracting $22.8 billion in net inflows during the first quarter of 2024, marking their first quarter without net outflows since 2022, according to Nasdaq's eVestment. This influx, driven by improved performance and adjustments to risk management strategies by firms like Tiger Global and Lone Pine following significant drawdowns in 2022, suggests renewed confidence in stockpicking hedge funds as multistrategy funds close to new capital and markets face uncertainty.

Analysis

Long-short equity funds have demonstrated a significant turnaround in investor sentiment, attracting $22.8 billion in net inflows during the first quarter, their strongest fundraising period in years and the first without net outflows since 2022, as reported by Nasdaq's eVestment. This resurgence, which constituted the vast majority of the $27.6 billion in total net flows into the hedge fund industry, marks a notable shift following the substantial drawdowns experienced in 2022 by prominent managers like Tiger Global, Coatue, and Lone Pine, who were heavily impacted by their concentrated tech exposures amidst rising inflation and interest rates. The renewed allocator interest is attributed to several factors: the improved performance of these funds, with some like Tiger Global rebounding; the closure of large multistrategy firms such as Millennium and Citadel to new capital; and a perception that stockpickers offer a strategic advantage in markets potentially unsettled by factors like President Donald Trump's tariffs. Performance metrics support this renewed confidence, with the eVestment report noting these funds were flat in Q1 while major stock indexes declined, and PivotalPath's data showing its global long-short index up 4.7% in May and over 6% for the second quarter to date. Key managers have publicly acknowledged past missteps, with Lone Pine co-CIO Kelly Granat admitting the firm 'lost balance' leading to a 38% drop in 2022, and Chase Coleman's Tiger Global detailing 'enhanced risk management processes' after its 56% dip in the same year. While the recent inflows are substantial, they have yet to fully offset the $83.8 billion in net outflows experienced by stockpicking funds over the preceding nine quarters, indicating a gradual rebuilding of trust and capital.

Key Decisions for Investors

• Investors should consider re-evaluating allocations to long-short equity strategies, particularly for managers who have demonstrably enhanced their risk management frameworks and shown resilient performance post-2022.
• It is prudent to closely monitor the Q2 performance and ongoing capital flow trends for these strategies to confirm if the Q1 inflow momentum and positive relative performance against benchmarks can be sustained, especially in potentially volatile market conditions.
• With large multistrategy funds increasingly capacity constrained, selective long-short equity funds may present viable alternatives for alpha generation; however, thorough due diligence on manager skill, revised investment processes, and fee structures is paramount given the sector's recent history of significant drawdowns and subsequent strategic adjustments.