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The current market environment could give active managers a chance to shine, but absolute returns could throw shade on strong relative performance.
We’ve written in the past about the long/short equity category and how the recent performance of several of these strategies has a lot to do with the fact they have high beta relative to the category, and lots of leverage. Today, we wanted to write about something else that has been slowly affecting the way performance of the category has looked relatively, and becomes even more impactful when Q3 2018 comes to an end.
I’m going to start with the assumption that if the title of this blog caught your eye, you probably already allocate to one or more long/short equity managers. And with that, I’m going to skip over the general arguments for long/short equity strategies, except to say that if you do use long/short equity, it is likely in part due to where we sit in the market cycle in terms of valuations (high), interest rates (low and rising), margin levels (high and likely to be falling), and Fed policy (it’s becoming less accommodative).
The market fireworks that started in February have continued well into June with the S&P 500 rising or falling greater than 1% for 39 days so far in 2018 (through June 30). And that’s more than double the number of days that experienced this movement in all of 2017.
After a somewhat rocky first quarter in equity markets, we saw an uptick of advisors searching for long/short equity strategies. We looked at some of the top performers in the category over the 3-year time frame and were surprised to see that some had outperformed the S&P 500 Index and/or MSCI World Index. This piqued our interest, so we decided to dig in.
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