Hedge fund alpha? What Alpha? Clearly not in long / short hedge funds in January and February.

A Credit Suisse report this morning noted an odd feat: The underperformance of the top 50 longs and shorts set a three year record in futility. Both long and short positions are under-performing in February, the report noted, which hasn’t happened since January 2013.

CS 2 23 long short ratio hedge funds

As stock market rally approached, Long / Short hedge fund managers reduced net long exposure

The fact that both long and short exposure isn’t working among relative value strategies is compounded by high position concentrations and industry rotations that cause popular shorts to rip higher while punishing longs lower, the report said.

After a punishing -2.8% drawdown in January, the long / short hedge fund category is heading for a loss of -4% to -5% in February, Credit Suisse’s Mark Conners predicted in the February 22 Global Hedge Fund Bulletin titled “Rally Offers Little Relief.” The lone bright spot is managed futures CTA exposure, he noted, which is up 4% as of January’s close and is projected to finish February up 1% to 3%.

One potential causation point for the poor performance could be due to improperly timed long / short ratio positioning. Equity relative value strategies cut both gross and net long exposure just as the market started to rally – the opposite of profitable.

CS 2 23 ISI quant research hedge funds

Hedge funds and institutional investors have different exposures

It’s not just long / short ratio dial management that appears at issue. A Feb. 19 Evercore ISI quantitative research noted that “sector allocation for hedge funds is detracting from performance as outside of their financials and health care underweight all other sector positions have returned negatively.” The most significant detraction points have been underweight exposure in Utilities and overweight in discretionary.

While performance has been negative, it could have been worse, as hedge fund moved to cut discretionary exposure and increased exposures to previously underweight financials. Hedge funds also moved significantly into the technology sector and pared their underweight in Industrials while decreasing their already underweight in the consumer staples sector, the report noted.

Hedge funds an institutional investors have different outlooks, with consumer staples and financials receiving a higher weighting in institutional portfolios while health care and technology are seeing a reduction in total exposure.

In terms of stylist exposure, Evercore ISI notes hedge funds have upped positive exposure to price momentum and historical growth and increased their negative exposure to traditional value. Institutional funds have also increased their positive exposure to price momentum and their negative exposure to traditional value.

CS 2 23 alpha hedge funds