Private Banks Looking to Increase Equity Exposure
With the overall popularity of long/short equity funds, it is not surprising that in May the BHA research team identified 126 accredited investors that were focused on evaluating new long/short managers. Also not entirely surprising is the preference for the strategy from funds of funds, wealth advisors, and family offices, which combined made up more than 70 percent of the total number of investors interested in long/short equity funds.
It is a bit unexpected, however, that private banks made up 12 percent of total long/short interest last month.
Apparently, private banks have become more positive on hedge funds as of late. According to an article in Reuters, private banks think that “ …hedge funds were no riskier than forex or equities, and should be included in portfolios for reasons such as diversification and their ability to make money in falling markets.”1
Specifically, some private banks are favoring long/short equity strategies. As noted in the Reuter’s article, “Barclays Wealth suggests clients shift part of their equity holdings into long-short funds that are better able to take advantage of choppy stock markets.”1
Although not every private bank active in the hedge fund space thinks long/short equity is the best or most attractive strategy, there are two underlying consistencies among those that do.
First, there is a strong preference for UCITS III-structured long/short funds. Eighty-five percent of the European-based private banks contacted by BHA will evaluate only UCITS-structured hedge funds.
Second, even though private banks as a whole are more positive on hedge funds, many of the investors BHA analysts spoke with are still being cautious. By and large, they still prefer managers with a significant track record and do not want their allocation to account for more than 10 percent of a fund’s total assets.
As we move into the second half of 2010, it is clear that long/short equity funds will maintain the popularity that presently surrounds them. If the market continues to be as turbulent as it has been of late, that popularity should increase, as more investors look for market downside protection. Private banks will then be just one category of accredited investors evaluating managers more closely in the long/short space over the next six months.
1 Reuters.com, “Asia private banks favour event-driven hedge funds,” May 25, 2010.