Published by Bob Elliott on Oct 24, 2022 11:05:59 PM
Long Short Equity hedge funds have taken a lot of heat in the press recently. After years of outperformance, L/S equity seems to be encountering a downturn which raises questions about whether these strategies are worth the cost.
L/S Equity strategies have performed relatively well over time, establishing a track record of outperforming index returns. However the fees meaningfully dilute the net returns. If investors could have accessed these returns without the fee drag their portfolios would have greatly benefited. But net of fees, these strategies seem mediocre. As depicted in the chart below L/S Equity gross returns outperform index investing, but after deducting the standard 2&20 fees the net return lags the benchmark.
Source: Bloomberg, HFR, Credit Suisse, Barclayhedge, Yahoo Finance and Unlimited Calculations
Before fees, L/S equity strategies deliver more attractive returns than holding equity index exposures. That trend appears on a long-term basis as well as the recent tumultuous period of up and down equity returns.
Source: Bloomberg, HFR, Credit Suisse, Barclayhedge, Yahoo Finance and Unlimited Calculations
L/S Equity strategies generally create opportunities for outperformance by limiting downside risk. Across multiple drawdowns in the last couple decades L/S Equity managers have shown the ability to limit losses even as the overall market declines. This year is no exception.
Source: Bloomberg, HFR, Credit Suisse, Barclayhedge, Yahoo Finance and Unlimited Calculations
As Andrew Beer said “The hedge fund fee structure has been a dream for managers and nightmare for investors.” Hedge Fund strategies like L/S equity can produce attractive return streams. The problem is generally investors experience diluted returns because of fees.
For informational and educational purposes only and should not be construed as investment advice. It does not constitute an offer to sell or a solicitation of an offer to buy any security. Opinions expressed are our present opinions only. No Representation is being made that any investment will or is likely to achieve profits or losses similar to those shown herein. No investment strategy or risk management technique can guarantee return or eliminate risk in any market environment. The material is based upon information which we consider reliable, but we do not represent that such information is accurate or complete, and it should not be relied upon as such. The historical analysis should not be construed as an indicator of the future performance of any investment vehicle that Unlimited manages.