Long/short equity drives hedge fund inflow surge in 2Q

As the popularity of stock picking rises, so do the prospects of long/short equity hedge funds that have helped to drive assets to a struggling hedge fund industry. A number of launches in the second quarter centered on TMT and biotech sector specialist strategies including firms such as OrbiMed’s New Horizons Fund; biotech fund M28 Capital; Dilation Capital, founded by Lone Pine alum Brian Eizenstat; and the EFF offering from UBS O’Connor. According to data firm PivotalPath, the majority of hedge fund launches have been either equity diversified or equity sector managers with an average launch size in excess of $200 million. Technology stocks as a defensive play contrasts with cyclical companies or sectors that tend to do worse in a market downturn, officials say. The global hedge fund industry’s second quarter asset surge in the last quarter was led by technology, activist and corporate fixed-income sub-strategies, according to Kenneth Heinz, president of Chicago-based HFR. Equity hedge fund capital grew by $95.5 billion to end the quarter at $925.4 billion, despite an estimated net redemption of $4.5 billion. “Extreme volatility in 1H20, including both the 1Q spike and 2Q reversal, represents a sharp and dramatic contrast to the beta-driven, risk-on sentiment which dominated 2019, creating an opportunity-rich environment for long/short hedge fund performance generation,” he added. Through June, technology and healthcare hedge funds are strong performers. The HFR technology sub sector index is up nearly 10% for the year-to-date through June and the healthcare sub-strategy index is up 7.41% over the same time period. The latest figures out of HFR show the hedge fund industry assets swelling to $3.177 trillion, which represents a record quarterly increase of $220 billion and the asset raise comes as the HFRI Fund Weighted Composite Index posted its strongest quarterly performance gain since the second quarter of 2009 or 9.1% in the Q2 2020. Officials point out that investors rebalanced capital as a result of the pandemic and to position for opportunities in the second half of the year. Outflows slowed following the first quarter withdrawals as estimated net asset outflows fell in 2Q to $12.2 billion or 0.3% of the total industry capital, which is a nearly 65% from the first quarter outflow of more than $33 billion. And while long/short equity firms historically have accounted for most of the industry assets and the greatest number of funds managed, their staying power seems to defy market cycle. Goldman Sachs in its recent prime brokerage survey of reviewed all the fund launches for the last decade through 2019. They found that for the most part hedge funds had greater than 50% odds of survival, but 57% of long/short equity funds are still trading after 10 years.

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