Looking for Institutional Long-Short Equity in a Mutual Fund

However, in spite of the historical underperformance of long-short equity mutual funds, it appears that the tide is turning in their favor due primarily to a recent migration of institutional hedge fund managers into the mutual fund space. Today, there are nearly 100 funds in Morningstar’s Open-End Long-Short Equity Mutual Fund category, which represents appreciable recent growth, but the number of mutual funds is still less than 10% of the number of institutional long-short hedge funds. Whether through a fund of funds or direct, many managers that in the past were only available via private partnerships are now accessible in mutual fund format.

According to a recent survey by Morningstar, long-short equity mutual funds are becoming the vehicle of choice for institutions. The survey stated that “while 61% of institutions said they accessed long-short strategies via hedge funds in 2010, only 26% indicated that they used hedge funds for that strategy [in 2012]. In contrast, more than 45% of institutions said they access long-short strategies via mutual funds versus 38% in 2010.” Josh Charney, alternative investment analyst with Morningstar, said that “the long-short mutual fund space has grown up a lot over the last few years,” noting that the factor for both retail and institutional investors boils down to finding the best talent.

It is clear that despite the superior outperformance of hedge funds, institutions are now allocating heavily to long-short equity via mutual funds rather than hedge funds. What remains to be seen is which funds within the mutual funds peer group can deliver on true institutional strategies with low beta exposure allowing the return to be generated predominantly from alpha.