Long/short equity set to perform in 2024

^{By Susan Barreto}

Thanks to a potential increase for global equity volatility, long/short equity managers may expect to outperform, according to recently released research from Cambridge Associates.

Long/short hedge funds are expected to do well due to the rise in short rebates and economic conditions within major geographic regions, wrote Joe Marenda, head of hedge fund research and digital assets investing at the Boston-based firm.

The trend will be helpful to U.S. equity long/short generalist strategies and sector specialists, as well as regionally focused equity long/short funds in Europe and Asia.

According to hedge fund administrator, equities funds were the top performer with a weighted average return of 5.1% in November 2023, followed by multi-strategy funds at 2.5% and fixed-income arbitrage funds at 2%.

Preliminary 2023 returns released the first week of January by Goldman Sachs showed that fundamental long/short equity gains for the year were 9.6%. On an asset weighted basis fundamental L/S returns rose 2.51% in December, driven mainly by beta gains as the Santa Claus rally made headlines.

“Higher short-term interest rates have increased the short rebate to levels unseen since the GFC,” wrote Marenda. “In fact, a fund’s short book now generates yields greater than benchmark equity dividend yields for the first time since 2008.”

The higher short rebate improves potential future performance all while lowering the cost of carrying short positions and increasing the opportunity set for single-name shorts, he found.

Europe and Asia

In Europe, active stock pickers have an “above-average” field of candidates for longs and shorts. The economic trends of reshoring of supply changes, low interest rate loan maturities that will peak in Europe in 2026 are set to drive winning and losing trades.

Long-biased trades have done well in Asia over the last decade, but Cambridge is expecting less directionally biased equity long/short funds to outperform in 2024. Nimbler the portfolio, the greater alpha opportunities as market leadership and underperformance are shifting more rapidly in 2024.

The story is much the same in the U.S., as long-biased sector strategies are going to face pressure from peers that have lower net exposures and skill of selecting shorts.

“The weak economic backdrop we expect in 2024 should lead to a greater focus among investors on earnings and free cash flow,” said Marenda. “This positions ELS funds well, as companies that have been cheap on a fundamental basis may perform better and companies that are expensive may be strong candidates for shorting.”

Going into 2024, it seemed that managers were already positioning for change. Goldman Sachs’ prime brokerage book was marginally net bought in December, but single stocks were net sold for a fifth straight month with sectors such as info tech, industrials, financials and energy leading in the sell-off and de-grossing activity in December.

_{This article, "Long/short equity set to perform in 2024” was originally published on January 9th, 2023 on Alternatives Watch and is republished here with permission from BMV Digital, Inc.}