Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Flows and Performance

The long and short equity strategy also saw steady growth in assets under management from the beginning of the millennium until 2008. Institutional investors are attracted to this hedge fund strategy because of its familiarity and similarity to traditional equity investing and its ability to positively impact portfolio returns when used as a substitute for traditional equity allocations. According to data compiled by HFR, the strategy had only $250 billion in AUM in 2002. It grew rapidly to approximately $700 billion by the end of 2007 before contracting during the crash. At the end of 2011, the strategy had grown to only $550 billion and not yet achieved its earlier peak.

The flows into all categories of long and short equity funds were positive for all but four years between 1990 and 2010. In the last quarter of 2008 and the first quarter of 2009, the sector saw significant redemptions and losses. It rebounded strongly in the second half of 2009 and in 2010 and 2011. Equity market neutral and risk arbitrage had similar overall flows.

Investors have generally been rewarded with positive quarterly performance over changes in the business cycle. Overall, the strategy lost money in the third quarter of 2008 but rebounded in the fourth quarter and into 2009, and over time, it has had significantly more positive than negative quarters. Equity market neutral and risk arbitrage exhibited somewhat similar characteristics, although with fewer down quarters than the ...