The Long Short Equity Has A Fee Problem, Not a Performance Problem
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Long Short Equity hedge funds have taken a lot of heat in the press recently. After years of outperformance, L/S equity has entered a downturn which raises questions about whether these strategies are worth the cost.
L/S Equity strategies are pretty good over time. These strategies have a long track record of consistently outperforming index returns. The problem is the fees. If investors could have added these returns at lower fees, their portfolios would have greatly benefited. But net of fees, these strategies are mediocre. The chart below gives perspective. L/S Equity gross returns outperform index investing, but add in 2&20 and net returns lag.
Before fees, L/S equity strategies deliver much more consistent returns than holding equity index exposures. That's true on a long-term basis and also more recently during this tumultuous period of up and down equity returns.
L/S Equity strategies outperform by limiting downside risk. Across multiple drawdowns in the last couple decades L/S Equity managers have shown a strong ability to limit losses even as the overall market declines. This year is no exception.
As Andrew Beer said in the above linked article, “The hedge fund fee structure has been a dream for managers and nightmare for investors.” At Unlimited we couldn’t agree more. Hedge Fund strategies like L/S equity are very good return streams. The problem is that most investors don’t see these returns because of the fees.
At Unlimited we are focused on bringing these strategies to every investor in a much lower cost and investor friendly structure compared to 2&20 because most investors could benefit from these types of strategies in their portfolio.