The first eight months of 2022 have been characterized by a turbulent market environment, with the technology stock-driven bull market upended by central bank tightening, an inflation crisis, supply chain slowdowns, Russia's invasion of Ukraine and fears for the global economy. Against this backdrop, the average long/short equity hedge fund declined 7.9%, widely considered a disappointing return, but superior to the 13.3% fall in the S&P 500 Index, which entered a bear market for the first time since its sudden dive in March 2020. Despite a summer rally, few are expecting a sustained recovery in stock market performance, amid fears of a global downturn brought on by inflation-busting rate hikes, providing an opportunity for long/short managers to improve in a more subdued and less volatile market setting
After some performance criticism this year, in which long/short equity has under-performed the wider hedge fund industry (down 7.9% compared to the sector's 4.2% in the first seven months), the strategy has a challenge to restore its reputation. CTA, particularly trendfollowing, and macro strategies have fared better in the market volatility, providing valuable diversification and positive return streams to investors during a historically bad period for the typical 60/40 portfolio of stocks and bonds. The underperformance is not without historical precedent: though long/short equity has outperformed hedge funds in 13 of the past 19 years, it notably did not in 2008 or 2018, the two worst calendar years for the S&P 500 this century. Long/short equity outperformed the S&P 500 by more than 10 percentage points in 2005 and 2007, suggesting substantial outperformance to the degree required to beat the average hedge fund, as managed in the past three years, is possible
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