Long/Short Hedge Fund Strategies Lose Favour
Source: TARA Capital, 6 July 2006

Investors are pulling back their allocations to hedge funds specializing in European long/short equities strategies for the first time in at least three years, Geneva-based hedge fund advisory firm TARA Capital said Thursday.

The move comes after European stock indexes lost nearly all of their 2006 gains in May and were largely flat in June.

In a survey of hedge fund investors based in Europe, TARA Capital found that twice as many of them - 22% - plan to reduce their exposure to European hedge funds that take long and short positions in equities, with only 11% planning to increase allocations. Two-thirds of respondents said they planned to keep their allocations at the same level.

European long/short hedge funds as measured in dollar shares were down 2.9% on average in May, according to data provider and trade publication EuroHedge. Even so, the funds were still up 6.33% on the year through May. By comparison, the Dow Jones STOXX 50 index of blue-chip European companies was down 5% in May and has returned just 0.89% so far this year after June's 0.59% gain.

Last year, the index was up 20.7%, and European long/short hedge funds gained 13.3%. Allocations to emerging markets and Japan long/short equities strategies are also set to drop, while U.S. long/short had an equal amount of respondents planning to increase or decrease the money they put into these types of funds.

However, no respondents planned to reduce their holdings in global long/short strategies, and 39% plan to add to their allocation. TARA Capital found that interest has picked up in multi-strategy funds, with 44% of investors planning new investments.
 
Distressed strategies, in which hedge fund managers invest in the debt or equity of troubled companies, are also set to gain new money, with nearly one-third or respondents planning to add capital to these funds. That marks a reversal of the past four quarters when investors indicated they would reduce allocations to distressed strategies.

The 21 investors surveyed by TARA Capital each quarter collectively control $95 billion of the roughly $1.2 trillion in hedge fund assets worldwide. The quarterly survey started in 2003 and this was the first quarter investors said they planned to reduce rather than increase their level of investments in European funds.