Hedge Fund Data

Equity long/short deep dive – 2021

02/07/2021
3 min read

Download full report

Download Article Download Article

12-month review to May 2021

Equity Long/ Short (“Equity L/S”) funds typically performed very strongly over the 12 months to May 2021, generating an average net return of 23.9%. The strategy posted positive returns in eight out of the 12 months and returns exceeded 2% in seven months. Conversely, negative returns exceeded 1% just once (January 2021). It is worth noting that broad equity market performance was typically even stronger over the period, with global equities† gaining 41.5%. However, the last 12 months were a considerable outlier in recent history for equity markets and Equity L/S funds, following March 2020. For perspective, Equity L/S funds compounded at 6.5% over the last 10 years and the S&P Global BMI at 8.1%.

The Equity L/S investment strategy represents the genesis of the modern hedge fund, pioneered by Alfred Winslow Jones in 1949. Nowadays, it remains one of the highest profile hedge fund strategies, as encapsulated by the media coverage of Melvin Capital during the GameStop turmoil of January 2021[1]. Largely seen as one of the simplest strategies to execute, it is no surprise that Equity L/S represents the largest strategy peer-group monitored by Aurum’s Hedge Fund Data Engine in terms of number of constituent funds and the second largest in terms of AUM. Around 1,030 of the 3,500 funds monitored are classified as Equity L/S, managing total assets of $587bn as at 31st May 2021.

Breaking the strategy down into sub-strategies, we observe some material differences in performance. Europe L/S and Other L/S define the range of returns among sub-strategies, gaining 14.3% and 35.6% respectively over the period. AsiaPac L/S also returned over 30% in the period, posting gains of 31.0%, with a low three-year beta to equities of 0.29, indicating alpha in AsiaPac L/S has been substantial. It is worth noting that the returns of the Other L/S sub-strategy were achieved on relatively low assets, as the smallest sub-strategy covering assets of $15.6bn, as well as a relatively high three-year beta to equities of 0.62. The Other L/S category largely comprises emerging market-focused funds. Although Europe L/S funds returned the least in absolute terms over the period, they also exhibited the lowest three-year beta to equities of 0.28. Fundamental Equity Market Neutral (FEMN) was the second poorest performer among sub-strategies, returning 14.7%. However, it is worth contextualising this performance—since the strategy aims to eliminate market exposure, the 14.7% gain is primarily driven by more idiosyncratic stock factors and consequent L/S spread.

Global L/S funds experienced the most severe drawdown over the period, losing 4.6% in January 2021 during the aforementioned market tumult. The VIX – a proxy for volatility, moved into the high 30s towards the final days of the month and other major markets experienced similar high intra-month volatility. This was caused, in large part, by the short squeeze phenomenon driven by retail traders coordinating via online forums, particularly Reddit. Some hedge funds were short these stocks and forced to cover, as well as liquidate other positions to improve liquidity, which caused knock-on effects to broader markets.  Prime brokers reported successive days of ‘worst alpha ever’ at the end of January before a dramatic reversal in the last part of the month extending into February.

Within sub-strategies, US L/S funds saw the greatest dispersion of 12 month rolling performance (+0% to +78% for the 10th to 90th percentiles), as well as the second greatest volatility (10.1%). Europe L/S exhibited both the tightest 12 month rolling dispersion (-1% to +42% for the 10th to 90th percentiles) and the lowest volatility (5.4%). When considering the risk-adjusted returns of sub-strategies, Other L/S had the highest Sharpe ratio at 3.28 (with a Risk Free Rate of 0.22%), followed by AsiaPac L/S with a Sharpe ratio of 3.09. All sub-strategies achieved impressive risk-adjusted returns over the period, the poorest being FEMN funds, which still managed a remarkable Sharpe ratio of 2.16.

The strategy produced net P&L of $106.7bn over the period and saw net inflows of $28.5bn. The largest flows, to the tune of $10bn, went to Sector L/S funds, followed by $8bn to Global L/S funds and $7bn to US L/S funds. European and AsiaPac funds saw slight net inflows, whilst Other L/S and FEMN funds had slight net outflows.

NET RETURN OF MASTER AND SUB-STRATEGIES

All figures and charts use asset weighted net returns unless otherwise stated. All Hedge Fund data is sourced from Aurum Hedge Fund Data Engine. * Aurum Hedge Fund Data Engine Asset-Weighted Composite Index. ** Bonds = S&P Global Developed Aggregate Ex Collateralized Bond (USD).  Equities = S&P Global BMI.

  1. Financial Times, Melvin Capital, GameStop and the road to disaster, 06/02/2021.

You may also like

Monthly hedge fund performance review – August 2023

22/09/2023

Hedge fund performance was moderately positive in August; the average hedge fund net return across all strategies was 0.16%. Most hedge fund strategy groups…

Monthly hedge fund performance review – July 2023

22/08/2023

Hedge fund performance was generally positive in July; the average hedge fund net return across all strategies was 1.05%. All hedge fund strategy groups…

Hedge fund industry performance deep dive – H1 2023

31/07/2023

In summary… The hedge fund industry* was up 3.4% in H1 23 with performance being heavily weighted to the start of Q1 and the end of Q2. The best performing…

Aurum’s quarterly review – Q2 2023

25/07/2023

Performance for Aurum’s commingled fund of hedge funds $US classes ranged from -0.9% to +0.2% in the second quarter of 2023. The outlook at the beginning…

Monthly hedge fund performance review – June 2023

20/07/2023

Hedge fund performance was generally positive in June; the average hedge fund net return across all strategies was 1.40%. Equity markets rallied in June,…

Quant hedge fund primer: demystifying quantitative strategies

22/06/2023

QEMN   |   Statistical arbitrage   |   Managed futures/CTAs   |   Quant macro/GAA   |   Alternative risk premiaIn summary Quantitative…

Monthly hedge fund performance review – May 2023

19/06/2023

Hedge fund performance was flat in May; the average hedge fund net return across all strategies was 0.02%. Market volatility was notably higher than observed…

Monthly hedge fund performance review – April 2023

19/05/2023

Hedge fund performance was generally positive in April; the average hedge fund net return across all strategies was 0.51%. April was a month of lower volatility…

Hedge fund industry performance deep dive – Q1 2023

28/04/2023

In summary… Global growth surprised markets positively in Q1 2023. Global equities*** and bonds** returned 6.35% and 3.19% respectively. Strategies…

Aurum’s quarterly review – Q1 2023

26/04/2023

Performance for Aurum’s commingled fund of hedge funds’ $US classes ranged from marginally negative to -2.4% for Q1. While Aurum’s portfolios delivered…

Monthly hedge fund performance review – March 2023

25/04/2023

Hedge fund performance was mixed in March, the average hedge fund net return across all strategies was -0.39%. Strategies exhibiting a higher beta to equities…

A guide to hedge fund fees and redemption terms

06/04/2023

In summary Investors determine whether hedge fund fees and redemption terms are appropriate through the manager selection process. Consideration is given…