Stock-pickers are starting the year hot, but investors still pulled billions. It shows how the hedge fund game has fundamentally changed.
- Long-short equity funds, the biggest strategy by assets in the $3.2 trillion hedge fund space, have had a hot start to 2019. But investors have still pulled out billions.
- The stock-picking space has created some of the most well-known hedge fund names, but investors have begun to move away from the strategy as cheaper index products tracking the public market have grown in popularity.
- Two multi-billion hedge fund managers - Jana Partners and BlueMountain Capital Management - have already cut their long-short strategy this year.
Stock-pickers can't seem to win.
Traditional long-short equity funds still hold the most assets of any strategy in the hedge fund world with $758.2 billion in assets as of the end of January, according to eVestment, but have seen money flow out of their strategies this year even when performance is up.
In the first month of 2019, the hedge fund industry saw $1.7 billion leave overall, while traditional long-short funds bled $5.9 billion in net outflows, despite performance bouncing back after a disastrous end to 2018.
That's despite the fact that several well-known stock-pickers have gotten out to hot starts, and the traditional stock-picking space is up as a whole - nearly 6% through January, according to eVestment. Bill Ackman's Pershing Square is up 29.3% through Feb. 19, the firm's website states, after finishing 2018 slightly in the red. David Einhorn's Greenlight Capital followed a year where "we weren't right about anything" with a 13.4% gain in the first month of 2019.
With a plethora of cheap index options and an explosion of quant funds, investors are turning away from broad and expensive stock-picking funds and searching out specialty products in more niche strategies for their active exposure. A recent note from Bernstein found that "we are rapidly moving towards a world where investment in public markets is done passively and the main expression of active investing is in private markets."
According to eVestment's report on the first month of sales this year, investors have been turning away traditional stock-pickers for roughly a year, even as performance has fluctuated.
"Sentiment toward long/short equity managers turned negative shortly after elevated losses in February 2018. In the eleven months since, redemptions have outpaced new allocations nine times, accelerating into the end of last year," the report read.
Even with returns rebounding, investors are still looking elsewhere - specifically multi-strategy and quant products.
For funds where stock-picking is just one of several strategies run by the hedge fund, there has been movement away from the traditional equities business. In axing their long-short funds, Jana Partners and BlueMountain Capital Management have, respectively decided to focus solely on their activist strategy and credit and special situations funds.
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