- Investors have pulled $150 billion out of stockpicking hedge funds over the past five years, the FT reported.
- The funds have been underperforming the US stock market, unable to adapt to a low-interest-rate era.
- Even as interest rates have risen in the past two years, the funds have eked out weak gains.
They were once thought of as the market’s star stockpickers. Now, they’ve suffered major outflows over the past decade.
Stockpicking hedge funds have seen investors pull out $150 billion over the past 5 years, the Financial Times reported on Wednesday. That’s as the strategies have underperformed amid central bank bond-buying and low interest rates.
Equity long-short funds invest in stocks likely to do well and bet against stocks that they think will tank. They delivered outperformed in the 1990s, notched double-digit gains throughout the dotcom bust, and some delivered big returns betting against lenders during the 2008 crisis.
But they’ve underperformed the US stock market for nine out of the last ten years, according to Nasdaq eVestment data cited by the FT. For investors, $100 invested in an equity long-short hedge fund 10 years ago would now on average have $163, the FT said. The same money invested in Vanguard’s S&P 500 tracker with dividends reinvested they would have now been $310.
A part of the reason why is that the funds weren’t able to adapt to a low-interest-rate environment. When the Fed chopped rates all the way to near-zero levels after the Great Financial Crisis, weak companies that these funds would usually bet against were suddenly able to trudge along with access to cheap debt.
But even as the Fed has yanked interest rates up in the past two years, the funds have struggled to make strong gains. The choppiness of the markets could be one reason why. In 2023, the funds made 6.1% on average, while the S&P 500 saw a 26.3% gain.
Despite the underperformance of late, Bank of America equity-strategy chief Savita Subramanian recently said volatile conditions are currently ripe for stockpickers.
“Passive inflows have slowed, active fees have been halved and fee compression is slowing,” she wrote in a note on Friday. “BofA Securities clients are now buying more single stocks than ETFs as a new generation of stock pickers has been spawned by Robinhood, ‘meme’ stock headlines, etc.”