Hedge Funds To Grow Out Of Long-Short Equity

Ian Allison

7 July 2006

Hedge fund investors plan to increase their exposures to most of the traditionally popular hedge fund strategies, with the exception of long-short equity, which can expect outflows, according to TARA Capital’s latest Hedge Fund Strategy Barometer. The HFSB is a quarterly overview of hedge fund investor trends, and was conducted with 21 European based investors who have a combined $94.65 billion invested in hedge funds. TARA Capital, said: "Investor appetite grows for relative value, CTA and multi-strategy hedge funds. However, one main sector of the market, long-short equity, might see some significant outflows over the coming months." Although global long-short and sector specialist long-short held up quite well, demand for the bulk of equity strategies has dropped. Most dramatic is the fall off in demand for European and Japan funds. For Japan only 28 per cent of respondents plan to make new commitments. This is a continuation of the long term decline in popularity for the sector, down from a high of over 90 per cent in the HFSB of Autumn 2003. According to the findings, hedge fund investors are determined to build up the size of their commitments to the relative value sector, with all three strategies experiencing their best results for over a year. This appetite is most pronounced for fixed income and convertible strategies, while demand for equity market neutral is now at its strongest level since 2004, with one third planning to increase exposures. After the near mass exodus from convertible arbitrage funds in late 2004 and early 2005, investors are becoming progressively more interested in the strategy as demonstrated by 28 per cent of respondents planning to add with only 6 per cent planning to reduce exposure. Multi strategy remains a favoured strategy with 44 per cent planning new investments. Demand for merger arbitrage remains consistent although at more muted levels, while almost a third of investors will be increasing their exposure to the distressed sector.