We anticipate that equity long/short (ELS) hedge funds will deliver above-average performance in 2024, driven by rising short rebates, heightened global equity volatility, and evolving economic conditions across significant regions. Both generalist strategies and sector-focused ELS funds in the US, Europe, and Asia stand to benefit from these favorable dynamics.
Key Drivers of Outperformance
1. Rising Short Rebates
Short rebates have reached levels not seen since the Global Financial Crisis (GFC). For the first time since 2008, short-position yields now exceed benchmark equity dividend yields. This dynamic reduces the cost of maintaining short positions and expands opportunities for single-name shorting, creating a strong tailwind for ELS strategies.
2. Focus on Fundamentals
We expect investors to prioritize earnings and free cash flow in a weaker economic environment. ELS funds are well-positioned to capitalize on this shift, identifying undervalued companies as strong long candidates while targeting overvalued firms for shorts.
Regional Outlooks
Europe: Increased Dispersion and Structural Shifts
European equity markets show above-median dispersion among listed companies, providing ample opportunities for active stock pickers. Structural changes, such as supply chain reshoring and the looming maturity of low-interest loans (peaking in 2026), are expected to create clear winners and losers. These dynamics favor regionally focused ELS funds, which can exploit this growing divide.
Asia: Alpha Opportunities in Rapidly Shifting Markets
After a decade of success with long-biased strategies, less directionally biased ELS funds are poised to outperform in Asia. Rapid shifts in market leadership among companies and countries in the region will reward nimble, well-managed portfolios capable of exploiting these changes.
United States: Favorable Conditions for Value Strategies
The combination of heightened economic dispersion and shifting market dynamics in the US will support ELS funds with a strong focus on value strategies. Managers with lower net exposures and emphasizing alpha-generating shorts will likely outperform. Long out-of-favor value-focused ELS funds, in particular, may benefit as investors gravitate toward fundamentally strong companies.
The evolving economic landscape and structural changes across regions present a unique opportunity for equity long/short hedge funds to outperform in 2024. By leveraging higher short rebates, capitalizing on regional dispersion, and responding to rapid market shifts, ELS strategies are positioned to deliver robust returns across global markets.
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