Is Long/Short Equity Hedge Fund Dead??
I keep hearing that long/short equity hedge funds have been struggling to generate alphas. Is it true? What do you guys think about the field in general? Where can I learn about them more?
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Hi, I am a newbie just joined WSO.
I am currently working in FoHF, so my job is to talk with PMs/IRs of equity L/S managers.
IMO, my short answer is Yes, they are struggling 'to generate alphas' because ETFs are bad for long/short.
However, it doesn't necessarily mean L/S HFs are struggling since many of them have long-biased and market is going in just one direction for many years.
Hope this helps. Thanks
I am seeing more and more candidates from top hedge funds interviewing for private credit and mezz opportunities - their view is yes it is not going great and the long term path doesn’t seem as viable...
to dumb it down, it's just frankly less efficient and more opportunities to add value IMO. or more candidly, it's probably a better place to hide out because while your $ upside is not as high, your downside is unlikely to be wiped out (unless you tried to catch the knife on some retailers...)
private equity skillset isnt that transferrable.
I don't think that's true. I have seen a handful of people go from PE to private credit and mezz, but not from hedge funds, especially not top hedge funds. As a PE fund, you can basically chose from a wide variety of private credit and mezz providers and spread just keep going down, while leverage is going up, due to the amount of capital being raised and competition with banks. I would argue that the industry outlook isn't that great as well. Additionally, the private credit and mezz business is completely relationship driven and I just don't see people from a hedge fund going down that route as the skillsets are quite different.
That's fair. I'd say anecdotally I haven't seen anyone make successful jumps from HF to PE except for those HF folks with 2 or less years of exp. If you were a top HF analyst you wouldnt have trouble going to PE, but for the less qualified candidates it's a lot more difficult. Paging APAE in case he has any insight on post-L/S HF recruiting.
While private credit / mezz outlook isnt that great, it sure beats trying to compete vs. Vanguard/BlackRock. If you look across the spectrum, distressed should be interesting in a couple of years (that is, if you can find a keep a job until then).
Completely agree (obviously also anecdotally speaking). Most people I have seen who work for private credit/mezz come out of lev fin so they already have more than 2 years of experience, meaning that they are determined to go down this path and have a skillset which doesn't align with that of an analyst at a HF. Generally speaking, I'd also say that private credit and mezz is seen as the more "pedestrian" investment strategy by those working at a HF.
No doubt that the outlook of private credit and mezz is better but I wouldn't classify it as good. Distressed/special sits will definitely be an interesting place to be in (hopefully) a few years, keeping and finding a job in the space will be difficult. Distressed/special sits funds have overhired over the last couple of years in anticipation of a downturn so you got a bunch of mid level people who have so-so experience.
Would be happy to hear APAE input as well (just mentioned him again because it doesn't look like it worked in your post)
You guys are hilarious. I started this before you put up the bat signal but got distracted. I just finished it now. West Coast Analyst
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Long-short is under both cyclical and structural duress.
Cyclical because hey, in this extended bull market it's incredibly hard to maintain shorts when fundamentals seem to be a thing no one is looking at.
Structural because (as others have mentioned) the massive asset flight to passive strategies is rewriting how the markets perform. If 40% of a name's float is tied up in Blackrock, Vanguard, Fidelity, and other index fund behemoths, it doesn't matter what happens to prove your thesis right (in either direction, long or short), the stock isn't going to react the same way.
Some data from 2Q2017: * Vanguard owns over 5% of the float in 491 of the names in the S&P 500 (vs. 116 in 2010) * ETFs currently account for >24% of domestic trading volume, up 20% from three years prior at 20% of volume * The percentage of equity-fund assets (as compared to individual or active institutional investors) has jumped in the wake of the financial crisis, rising from 19% in 2009 to 37% in 2017
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I don't have much insight on private credit recruiting.
I can say just about as much as kinghongkong did, which is that all the junior or mid-career guys I've seen move over came from a role in LevFin (followed by DCM, then M&A in terms of frequency).
I haven't seen too many vanilla long-short guys move to private credit. The people I've seen move from a different buy-side role to private credit were guys at the distressed or multi-strategy shops like Centerbridge or Anchorage or Ares who play across the capital spectrum, so their experience was pretty transferable.
Really strong hedge fund analysts who don't like their current seat often gravitate to the few shops that are still performing strongly. It's a natural law: like attracts like. Some will get together underneath a senior analyst or PM and launch a new strategy, often seeded by the bigger guy they just left.
For the bigger guy it makes a ton of sense.
(i) If you're struggling to put up good returns, a smaller manager can execute a good strategy in smaller-cap stocks (where management may not be as professional and therefore be more responsive to any kind of activism; also, where index funds are likely not as present) ...
(ii) If you seed him, you get preferential terms. At minimum a fee concession (1-and-10), probably even a chunk of the GP (10-40%).
(iii) Who do you trust more than a former analyst of yours who generated alpha for you, who you trained in equity research, who you paid bonuses to for a few years?
(iv) You don't mind paying a fee layer out of your own fund, because the bet is that the net returns generated still exceed whatever gross returns are currently coming out of your large vehicle.
For the new manager it also makes a ton of sense. Whatever comp structure you had at your former shop pales in comparison to being a GP on your own. Even if your asset base is solely your seed investor from launch, 1-and-10 on a $200m fund that does 12% gives you $2.4m to split among whoever is there. Nobody is on a comp structure within someone else's fund that is more attractive than that. Besides, your bet is that with any kind of performance, you'll attract new commitments that you can charge a traditional fee structure on.