Hedge funds could be staging a comeback as short bets post best month since 2010

A trader works on the floor of the New York Stock Exchange (NYSE) on August 5, 2021.

Andrew Kelly | Reuters

Short selling is booming again after being mistaken for almost dead due to the GameStop mania, raising hope that hedge funds could change things in 2021.

The short book of hedge funds generated the best alpha since 2010 in July and is now outperforming the long side of their strategies, according to data from Prime Brokerage by Morgan Stanley.

The rebound came after a difficult start to the year, when the monstrous GameStop short squeeze caused great pain to short sellers betting against the brick and mortar retailer. As the meme stock trend spread, it prompted hedge funds to place short bets and generally take less risk.

The outperformance of bearish bets is good news for hedge funds, which are regaining popularity after a decade of mediocre performance that has supplanted cost-conscious investors. After three consecutive years of outflows, hedge funds saw more than $ 6 billion in customer inflows in the first quarter, bringing the industry’s total assets under management to a record $ 3.8 trillion, according to HFR data.

Estimated Assets Under Management

Note: The data for 2021 are available in the first quarter.

Source: HRF

Estimated Assets Under Management

Note: The data for 2021 are available in the first quarter.

Source: HRF

Estimated Assets Under Management

Note: The data for 2021 are available in the first quarter.

Source: HRF

“Investors are turning to alternative investments for consistent returns after a strong rally to record highs in order to stay in the market,” said Greg Bassuk, CEO of AXS Investments. “Hedge funds also have the component of hedging against the risks of Covid and the throttling of the Fed.”

The stars seemed to be pointing towards a hedge fund revival. For starters, volatility has made a comeback amid a laundry list of macro risks, from a worsening pandemic to a withdrawal of monetary stimulus and a slowdown in economic growth.

Meanwhile, the equity correlation has fallen from a high in March 2020 to an all-time low, which Bernstein says is an ideal environment for stock pickers.

“In an environment where stocks aren’t extremely moving in the same direction, it’s easier to pick winners and losers,” said Sarah McCarthy, global quant and equity strategist at Bernstein, in a note.

According to HFR, hedge funds were up 9.2% in 2021 by the end of July. They are still clearly lagging the market as the S&P 500 is up 17% over the same period.

– CNBC’s Nate Rattner contributed to this story.

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