The world's most popular hedge fund strategy is no longer working.
Lansdowne Partners this week shuttered the long/short equity fund that made it famous, raising fears about the future of peers who make money by betting on winning stocks and shorting losers. Sloane Robinson also called it a day after more than 25 years of buying and selling equities.
The closures reinforce the bruising reality that such funds have captured most of the market's downside in recent years, but very little of the upside. They also beg the question: If the arrival of a deadly pandemic that's pummeled the world's economies can't work in short-sellers' favor, then what can?
"The existential crisis is real," said Andrew Beer, founder of New York-based Dynamic Beta investments. "This is not a new phenomenon, but has gotten worse over time. When markets go down, hedge fund stocks go down more."
Investors diversify into hedge funds because the ability to short helps soften the blow from declining share prices. But when the market tumbled in March, 87% of equity hedge funds in a Bloomberg index lost money, with half declining by more than 10%.
Lansdowne's reasons for dumping its flagship strategy are painfully familiar to hedge fund offices around the globe. For one, it's hard to imagine worse future conditions for companies than the impact of coronavirus, and yet their share prices are still holding up. Secondly, interest rates are forecast to stay close to zero for a very long time, which will inevitably act as a tailwind for all stocks.
Hedge funds of all shades have struggled amid quantitative easing since the last financial crisis. But equity strategies have been hit the hardest, with many losing more than the broader market when stocks have tumbled.
"Given the unprecedented level of support received by the market following COVID-19, equity long/short investing is becoming increasingly more challenged as a strategy," said Nicolas Roth, head of alternative assets at Geneva-based private bank Reyl & Cie. "The short book can quickly become a drag on performance."
Equity long/short hedge funds tracked by Hedge Fund Research lost more on average than the S&P 500 index in the first five months of 2020, according to data compiled by Bloomberg. Last year, when the index surged 31.5%, long/short funds captured less than half of those gains. In 2018, they also lost more than the index.