Investors May Reduce Equity Share

Long/short equity funds look less attractive as stock markets continue their steep ascent from the depths of the 2008-2009 slump.  It may sound paradoxical, but a very strong market can be a disadvantage for long/short strategies. 

In an up market long-only investments have the advantage and short trades often lose money. Plus, long-only is typically cheaper than long/short, especially as  passive index investments, which are extremely low cost, tend to do as well as or even better than active managers as a group.

As for hedging and diversification, other strategies like global macro are better diversifiers and less likely to go down with the equity market should there be a downturn.

Still, long/short equity looms large in fund of funds portfolios, as it has for many years. One fund of funds has about  45% of its assets in various equity strategies. The manager expects to reduce that share slowly and not by a lot. “Strategy allocation is important but the adjustments are around the edges,” says the manager.

Others say that institutions increasingly follow the idea of combining low-cost index investments with certain diversifying strategies—an idea that has been around for some time. From this perspective, long/short equity contains too much of the market return that the index provides. “It has too much beta,” says an investor.

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