Long/ Short Equity Popular Among Fund Managers But Not Investors

It’s looking like hedge fund managers might not be so attuned to the wants and needs of investors. Studies show that long/ short equity is the most popular strategy employed by fund managers, both for established and new funds. However, investors are pulling capital out of long/ short equity funds at a rapid pace—and have been for the last 12 months at least.

According to a study based on market intelligence firm SigTech’s hedge fund clients and data from Preqin, 67% of all hedge funds globally and 70% of all new fund launches are U.S.-based. The next-closest region is the U.K., where 9% of the world’s hedge funds are based.

Twenty-five percent of the world’s hedge funds are headquartered in New York City, with London coming in second place with about 8% of the world’s hedge funds.

The most popular hedge fund strategies

The SigTech study shows that the most popular hedge fund strategy among fund managers right now is equity long/ short, with 6,925 hedge funds in the world following that strategy. Twenty-six percent of the world’s hedge funds are long/ short funds.

Multi-strategy wasn’t far behind equity long/ short. Almost 4,900 of the world’s hedge funds are multi-strategy, amounting to about 18%. Other equity strategies came in third place at about 12%, followed by fixed income and credit at 11%, event-driven at 7.5%, and managed futures at 6.7%.

Crypto made the list of the top 10 most popular hedge fund strategies among managers, coming in at tenth place with 3% of hedge funds or 774. This was the first time crypto hedge funds appeared in the top-10 list of hedge fund strategies.

SigTech also notes that 22% of the world’s hedge funds are using a purely quantitative investment process, and about 2% say they are using artificial intelligence.

New hedge fund launches

The study also looked at launches of new hedge funds. On average, almost 2,000 new hedge funds have been launched per year since 2019. Of the 5,500 new funds launched since 2019, 70% are based in the U.S., followed by 9% in the U.K. and 5% in China.

Once again, the most popular strategy for these new funds is equity long/ short, followed by fixed income and credit, other equity strategies, and multi-strategy. SigTech finds that 19% of the new hedge funds launched followed an equity long/ short strategy, while 9% followed a fixed income or credit strategy.

“The robust level of new hedge fund launches reflects a sustained strong demand from investors for innovative and uncorrelated investment strategies to meet return expectations in an increasingly challenging market environment,” says Daniel Leveau, VP of Investor Solutions at SigTech. “Hedge fund growth shows no signs of abating, fueled by the ever-increasing investment opportunities in the market, and the growth of new data and tools available to these funds.”

Crypto fund launches surged in 2021

The fifth-most popular strategy based on new fund launches since 2019 was crypto, with almost 6% of the fund launches following that strategy. Of the 310 crypto hedge funds launched since 2019, 171 launched in 2021 alone. That’s a new record for crypto hedge fund launches. Once again, the U.S. is leading the way, with 80% of crypto hedge funds domiciled in the U.S.

Flow trends show difference in preferences among investors

While equity long/ short is the most popular strategy among fund managers based on the number of funds utilizing the strategy, flow data show investors are less keen on the strategy. In its recent analysis of flow trends, With Intelligence found that investors had pulled $28.5 billion from equity long/ short funds over the last 12 months.

The outflows picked up dramatically in November, December and February. With Intelligence also found that roughly half of investors are unlikely to increase their allocations to equity long/ short funds in the next 12 months.

According to With Intelligence, 50% of foundations and endowments, 52% of family offices, and 79% of public pensions are unlikely to increase their allocations to equity long/ short funds. On the other hand, 35% of foundations and endowments, 48% of family offices, and 21% of public pensions expect to increase their allocations to funds following this strategy.