Institutional Investor's Alpha Magazine - March 2009 - (Page 49) Strategies Long-Short Equity Better Than This f long-short equity managers can’t beat the market, what purpose do they serve? That’s a question investors are rightfully asking after 2008, when so many such managers were buried. Even the Tiger cubs, offspring of Julian Robertson Jr.’s famed Tiger Management Corp. and purported masters of the art, had a rough time of it — although most did better than cub Stephen Mandel Jr., whose Lone Cypress fund was down 32.56 percent. Long-short equity, by far the biggest category of hedge fund in terms of sheer number of funds, actually fared relatively well: Hedge Fund Research’s HFRI equity hedge index was down 26.16 percent on the year, compared with the 37 percent drop in the Standard & Poor’s 500 index. “Relatively well” isn’t enough, however. Investors would’ve done better last year going whole hog into cash. A sinking market wasn’t the only hazard the sector faced in 2008. At the height of the market panic, regulators around the world imposed restrictions on short-selling. And the credit crisis prompted major institutional investors to curtail or even drop their stock-lending programs altogether, making it harder and costlier for short-sellers to borrow stock. They’re Supposed to Be Long-short equity hedge funds come with the expectation of absolute returns. Last year many of them didn’t deliver. By Neil O’Hara Yet Luca Mengoni, chief investment officer for the single-manager division at London-based Pioneer Alternative Investments (which reported $5 billion in assets under management on December 31, down from $9.5 billion on June 30), an affiliate of Italian money manager Pioneer Global Asset Management, points out that in periods of exceptional volatility, market prices often deviate far from intrinsic values, which he says gives fundamental longshort-biased managers like Pioneer an edge. Instinct and judgment can make the difference. “Once-in-a-century events are by definition very difficult to model quantitatively,” Mengoni notes. With so many asset classes looking cheap, Mengoni argues, long-short equity strategies are particularly valuable now. He expects high volatility to persist for some time, which increases the chance that outright long strategies may suffer no matter how cheap the assets appear to MARCH 2009 • INSTITUTIONAL INVESTOR’S ALPHA • 49
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