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L/S equity should not be ignored, warns Goldman Sachs


Date: Wednesday, February 1, 2012
Author: Charles Gubert, COO Connect

Investors should not write off long/short equity hedge fund strategies, the co-head of cap intro at Goldman Sachs has warned.

According to Chicago-based Hedge Fund Research, equity hedge funds suffered $8.6 billion in net outflows in the fourth quarter of 2011 reducing full year inflows to $2.2 billion. The HFRI Equity hedge Index finished 2011 down 8.25%.

“Predicting success is inversely correlated to the hedge funds which are attracting capital. In 2009, people pulled cash out of equities as they felt equities and fundamental analysis were dead. Conversely, macro is currently viewed as the strategy to be in right now but only a few brand names did well last year. At best, macro was rather flat. Equity long/short is not popular today, but it will pick up as the year progresses,” said Marc Gilly of Goldman Sachs.

The only strategy to post a gain in 2011 was relative value arbitrage, which rose a rather modest 0.51% - and attracted $35.9 billion in the process. Meanwhile, macro fell 0.04% in the fourth quarter with a year-to-date (YTD) decline of 3.78%. Nevertheless, the strategy saw $27.9 billion inflows in 2011.

Brevan Howard, the $25 billion hedge fund run by Alan Howard, was one of very few macro funds to see a performance gain last year – it was up 12.7% in 2011. However, hedge fund performance, both good and bad, has been exaggerated, according to some.

“When hedge funds are written about as a whole industry there is often a selection bias. Often only a few examples of either bad or good performance are used to outline overall market trends. It is less black and white than that. If you had stopped the clock in mid-October just before the rally began, hedge fund performance was down 4% while markets were down between 10 to 12%. On the whole hedge funds deliver better performance on a risk adjusted basis in volatile markets,” said Gilly.