Hedge funds losing fans amid struggles

The long and short on hedge funds is that long and short isn’t working so well anymore.

That’s the rather simple strategy that built the $3.2 trillion industry — the oncedurable “buying long” when you figure a stock will go up, and “selling short” when you reckon the opposite — and that basically put the “hedge” in hedge fund. These days, it’s unreliable, at best.

The techniques of the future? Think niche, such as litigation finance or private debt and equity, from Deere & Co. tractor dealerships to a banana plantation in Costa Rica.

There are any number of reasons trotted out for long-short’s fallibility: little volatility, low interest rates, so much passive investing in stocks by the likes of Vanguard Group and BlackRock, too many quantitative funds in the business. What’s more, the number of publicly traded companies in the U.S. is, at about 3,700, half what it was in 1996.

The explanations aren’t just excuses. Low rates mean funds earn nothing on the cash produced when they sell a stock short. Passive investing and quants tend to push troubled companies higher.

“The one strategy that is facing an existential question is long-short equity,” said Ted Seides, former head of hedge-fund investor Protégé Partners.

Most everyone agrees the question will remain, at least until the almost nine-year bull market comes crashing down. Only then will it be clear whether stock hedge-fund managers can protect capital, or even make money.

Sure, some have continued to profit, but they’ve managed to do so by betting on technology companies and limiting wagers of any kind on shares they expect to tumble.

The disillusionment with stock hedge funds comes as an increasing number of institutions have grown disenchanted with the industry’s returns overall, creating the worst climate for raising money since the financial crisis. Last year, investors pulled a net $106 billion as the private partnerships trailed global stocks, according to eVestment.

Hedge-fund assets are up just 4 percent this year. The number of startups — 369 in the first nine months of the year, according to Hedge Fund Research — is the fewest since 2000, when the big internet bubble burst.