Long-Short Equity Hedge Funds Keep Losing Investors

But some managed futures managers are making a comeback.

Qilai Shen/Bloomberg

Qilai Shen/Bloomberg

Managers of long-short equity hedge funds are having an undeniably bad year for fundraising.

Investors redeemed about $41 billion from these funds on a net basis during the first 10 months of 2019, almost quadrupling net outflows seen in all of 2018, according to eVestment’s monthly flows report. Redemptions from long-short equity hedge funds in the third quarter were larger than outflows recorded in all of last year, when investors pulled a net $10.74 billion from the strategy.

Long-short equity hedge funds make up almost a quarter of total hedge fund industry assets, with an estimated $764.47 billion under management, according to eVestment. But in 2019 they have accounted for close to half of the industry’s total net outflows, which amounted to $87.9 billion by the end of October.

The rest of the redemptions this year have been primarily divided among macro hedge funds — down $23.21 billion through October — multi-strategy funds, and directional credit managers. Managed futures hedge funds, which suffered the worst outflows in 2018, also saw net redemptions through the first 10 months of 2019. But in recent months, investors have come back around to the strategy, which had the highest net inflows of any hedge fund strategy in October, according to eVestment.

“Managed futures had been feeling a similar level of redemption pressure as long/short equity until the trend shifted in August 2019,” eVestment said in the report. “The strategy produced several months of good returns after January 2019, resulting in allocations eventually outpacing redemption pressures.”

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The strategy’s new-found popularity could also be explained by investors preparing for the end of the long-running bull market, as managed futures funds can outperform in a bear market.

Although the strategy attracted $2.55 billion in inflows in October, investors have been picky about which managed futures managers they invest with. According to eVestment, 55 percent of managed futures managers faced redemptions in October, and almost 70 percent haven’t seen net inflows this year.

The funds seeing inflows this year appear to be “meeting or exceeding investor expectations,” eVestment said. “The ten largest inflows in 2019 have gone to products returning an average of nearly 8 percent this year” and with average losses of less than one percent in 2018.

If flows continue to reflect past performance, managed futures funds might be in for another rough spell. According to eVestment, September and October were “difficult for the strategy and even for many (but not all) of these favored products.”