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I saw recently that a report from law firm Seward & Kissel says that three-quarters of the funds in its 2022 New Manager Hedge Fund Study ran equity hedge strategies.
That sounds high, but it shouldn’t be that much of a surprise. The majority of hedge funds we launch on our platform manage equity hedge strategies. It’s the most common underlying exposure, for many reasons, including what we think is a critical consideration for any new or emerging manager looking to launch a fund – that of investor understanding.
New hedge funds sourcing their first chunk of outside capital (after their friends and family money) tend to do that from high-net-worth individuals and family offices. And not all of them are fluent in all hedge fund strategies. Some strategies are incredibly complicated, and most investors aren’t domain experts in all areas. Like real estate in the private markets space, equity investing is generally more understood than others; many investors don’t invest in something they don’t understand – or won’t make the effort to understand – so as a door opener, running an equity hedge strategy helps.
On the flip side, due to the sheer number of equity trading hedge funds around, it can be difficult to differentiate yourself – especially if you don’t have a lengthy track record. But still, there are other benefits, of course. There’s a vast universe of stocks to invest in, even if you’re only running a US-specific strategy. Liquidity is excellent, and there’s an enormous amount of data available to support decision-making and strategy implementation, whether the approach is discretionary or systematic.
Those that started up last year did so in an unfriendly environment. 2022 wasn’t great for the hedge fund space – macro strategies aside – as geopolitical and macroeconomic events played havoc with markets, causing equity hedge strategies to return -10.13%, according to HFR.
But the upside of this is that the first half of the year has been much better for the equity hedge space – HFR published its hedge fund returns data for July this week, with equity hedge strategies returning +2.03%, padding 2023 gains to +7.83%. July was the third best month this year, after January (+3.83%) and June (3.06%). Many of the funds that launched last year are now showing absolute gains (based on their launch date) – good news for these early investors.
Whether that continues in H2 remains to be seen. Some market commentators say that the earnings troubles of the past few quarters is mostly over, and others say that the second half of the year will see stock prices fall due to ever increasing interest rates hurting consumers. But whether equity hedge strategies give up some of 2023’s ytd gains in H2, or add to them, I doubt it’ll have much of an impact on Seward & Kissels report next year. Investors want to understand what they’re buying, and equity-focused funds will always have that advantage over others.
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Gregory Poapst is a Managing Partner at Fundviews Capital. Connect with him on LinkedIn here.
Fundviews Capital is a full-service end-to-end Fund Management Platform. Our platform provides a complete end-to-end solution for asset managers or wealth managers to structure, launch, operate and grow their professional investment funds. You can launch a fund in a matter of weeks, not months, and with minimal capital outlay – not only reducing the risk of launching a fund but also maximizing your chance of success. Once launched, you will find that a dedicated team of professionals is just a phone call or email away at all times, handling all aspects of the back and middle office for your fund.