"Under High Interest Rates, Long-Short Funds See $150 Billion Outflow Over 5 Years"

Underperforming the S&P 500 Index Increase Rate

It has been revealed that approximately $150 billion in investments have been withdrawn from U.S. long-short funds, a representative investment vehicle for defending returns in a bear market, over the past five years. This is due to their returns lagging far behind funds tracking the S&P 500 index, which consists of large-cap U.S. stocks.

On the 7th (local time), major foreign media outlets cited data from market research firm Nasdaq Investment, reporting that from 2019 to 2023, about $150 billion was withdrawn from equity long-short funds, shrinking total assets under management to $723 billion. Equity long-short funds have recorded net outflows for six consecutive years.

Long-short funds are designed to achieve returns by buying undervalued stocks and selling overvalued stocks. They have attracted attention for defending returns even during downturns such as the 1999 dot-com bubble and the 2008 financial crisis. However, entering the late 2010s, investors, frustrated by the funds’ inability to outperform the U.S. benchmark indices, have been withdrawing their investments from long-short funds.

The average annual return of U.S. long-short funds underperformed funds tracking the S&P 500 index in nine out of the past ten years. During the ultra-low interest rate period triggered by COVID-19, liquidity flooded asset markets such as stocks, causing the prices of bearish companies targeted by short selling to surge. However, even during the past two years of sustained inflation-driven high interest rates, long-short funds failed to prove their effectiveness. Last year, while the S&P 500 index rose 26.3% fueled by the AI boom, long-short funds only managed an average increase of 6.1%.

If you had invested $100 in an equity long-short fund ten years ago, you would now have an average of $163. The return over this period is 63%. In contrast, if you had invested the same amount in the 'Vanguard S&P 500 ETF' (VOO), which tracks the S&P 500 index including dividends, you would have received $310. This represents a 210% return, more than three times higher than that of long-short funds.

Nevertheless, management fees for long-short funds are relatively higher than those for funds tracking the S&P 500 index. Long-short fund managers explain that this is due to the significant time and effort required to design the fund structure.

Some expect that the era of long-short funds is approaching as the impact of high interest rates continues. Keir Varley, Co-Head of Alternative Investment Solutions at Swiss private bank UBP, said, "With high interest rates, market attention will shift back to corporate fundamentals." Mario Unali, portfolio manager at investment firm Kairos, predicted, "We will see long-short funds return to levels seen before 2008."

However, there is also a counterargument that as central banks worldwide are expected to pivot their monetary policies this year, the appeal of long-short funds may continue to decline.

This content was produced with the assistance of AI translation services.