Post-Crisis, Nimble Hedge-Fund Strategies Survive
Equity Hedge managers invest in global, regional, or sectoral equity markets. They invest long and short, generally meaning they borrow stock and sell it, hoping the price will fall by the time they have to return the stock to the lender. Some equity managers short the market to hedge risky positions, while others use shorting to make money outright. Theoretically, this strategy is able to make returns both when the market rises and when it falls.
How has this strategy—which most closely resembles the original definition of “hedge fund”—lost so much ground?
Managers say good shorts are hard to find. “Its very difficult to find stocks that are overvalued. You have 1,500 hedge-fund managers in the U.S. chasing the same market inefficiencies. Often, equity managers are more heavily weighted in longs than shorts,” says Hermitage Capital's Browder.
Mark Spitznagel of Universa Investments agrees: “I prefer niches where there are clear competitive advantages. These are smart guys chasing essentially the same inefficiency. They're also all in a very short time horizon. I would never want to be in that game."
Universa, launched in 2007, runs a niche strategy called “tail risk,” which is more akin to risk-management strategy than a hedge fund. This manager buys and sells options that will benefit if a very rare, large market event occurs.
Is this the next hot strategy? In this "Black Swan" decade—marked by the fall of Lehman and the flash crash—nothing seems impossible.