Institutional Investor Appetite for Long/Short Hedge Funds

Date: Tuesday, February 5, 2013
Author: Graeme Terry, Prequin

Long/short funds are a core component of the hedge fund industry and this strategy remains the most commonly sought strategy amongst institutional investors. The majority of investors on Preqin’s Hedge Fund Investor Profiles database include an allocation to long/short funds as part of their hedge fund portfolios. Long/short funds also account for the highest proportion of funds on Preqin’s Hedge Fund Analyst database, representing 41% of all funds currently included.

The long/short category of funds on the Preqin database includes the following sub-strategies: 130/30, directional, long bias, long/short credit, long/short equity, short bias, value-orientated and variable bias. Long/short equity is regarded as the core hedge fund strategy and 92% of long/short investors include an allocation to this approach. Long/short credit funds are also popular with 37% of long/short investors which include an allocation to this strategy. Long bias strategies are utilised by just over 10% of long/short investors and asset manager Milltrust International plans to focus on this approach over the coming year.

Long/short strategies are common among all major institutional hedge fund investor groups with approximately 90% of funds of hedge funds, endowment plans and foundations including this strategy within their portfolios. A slightly smaller proportion of pension funds include an allocation to long/short strategies, but the majority of these investors (77%) still include this approach as part of their investment strategy. Overall, more than 80% of all investors on the Preqin database indicate a preference for one or more of the long/short approaches.

A number of investors have expressed concerns over the performance of long/short equity funds over the previous year, with the strategy being the most commonly identified as falling short of investor expectations. Despite this, investors are continuing to include long/short equity as part of their current searches, suggesting that investors still believe it possible to find successful managers in the space. An attractive feature of the long/short space is the diversification as funds are varied in terms of sector, capitalisation and regional exposure. Fund of hedge funds manager Casteel Capital is an example of an investor looking to increase exposure to long/short equity funds over the coming 12 months.

Long/short remains the most commonly sought after hedge fund investment approach and institutional investors plan to keep the strategy as a core component of their investment portfolios. Poor performance of long/short funds in 2012 is a concern for investors but these funds remain well placed to take advantage of opportunities in 2013. The diversification benefits of this strategy mean that it will continue to remain a core part of institutional portfolios, but managers need to deliver strong performance to stop further dissatisfaction.