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The long and the short of it

Looking for value at the level of individual stocks is becoming increasingly difficult.

Pity the stock pickers. This has been a year to forget for long/short equity strategies. The reasons are multifold, but boil down to one simple factor. Equity markets have mainly been driven by macroeconomic events, as well as the anticipation of such events. The latest example has been speculation about the timing of the next U.S. Federal Reserve (Fed) rate hike, which we expect in December.

This makes life difficult for hedge funds seeking to make money by identifying winners and losers within particular industries. At the beginning of 2016, worries about China, a collapsing oil price and the turmoil in high yield led to market weakness across the board. Similarly, the Brexit shock caused some stocks to plummet, before swiftly recovering – often without any, immediate tangible changes to the underlying businesses or their prospects.

Things may not get easier any time soon, with the U.S. elections and the constitutional referendum in Italy looming. France and Germany are due to vote next year. Meanwhile, many investors may be growing doubtful on the potency of central-bank announcements – at least when it comes to further loosening measures in Europe and Japan. Against this background, we have downgraded our outlook for long/short equity strategies and continue to see better opportunities in other areas, notably discretionary-macro strategies.

A difficult year for long/short equity strategies

The HFRX Equity Hedge Index is compiled of equity strategies which maintain both long and short positions. It has significantly underperformed the S&P 500 Index.

A difficult year for long/short equity strategies

Source: Bloomberg Finance L.P.; as of 9/19/16

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