After a legendary fightback, active managers are at risk of blowing a big year as the delta-variant surge threatens the great reopening trade.
With defensive wagers like Big Tech reclaiming the equity leaderboard and undervalued companies harder to find, stock pickers are finding life tougher after notching big gains in the early-2021 market rebound.
After the best first-half since 2003, long-short equity funds have risen just 0.8% since the end of June, a Hedge Fund Research index shows. One-third of large-cap mutual funds are beating their benchmarks this quarter, compared with 57% in the first three months of 2021, Goldman Sachs Group Inc. data show.
Other metrics paint a starker reality for fast-money investors, even as they draw in billions of dollars after a decade to forget.
Their recent struggles have sent the six-month return on a Goldman Sachs basket of equities beloved by hedge funds to 13 percentage points below the S&P 500. That’s the worst run since 2008, according to a note last week, and takes the shine off the industry’s strong start to the year overall.
“The environment for stock-picking had indeed improved earlier this year,” Ben Snider, senior strategist at Goldman, wrote in an email. “However, since the end of the first quarter, dispersion has declined, and it now registers in line with the very low levels that characterized the difficult stock-picking environment ahead of the pandemic.”
With the gap between winning and losing stocks widening in 2020, active managers exploited market dislocations to ride the broad equity recovery. But with megacaps like Microsoft Corp. and Apple Inc. dominating market gains since June, beating benchmarks is proving a tough business once more—a challenge reminiscent of the pre-pandemic years.
All this comes despite the fact that the industry’s bearish bets are starting to pay off again after a brutal first quarter in which hordes of day traders banded together on Reddit to engineer short squeezes in companies like GameStop Corp.
As retail-trading activity subsides from peaks, a basket of the most-shorted stocks has trailed the broader market this quarter—meaning hedge funds’ bearish wagers are finally making money.
But rising infections and new fears on economic growth are testing the bullish case for investors of all stripes, with the S&P 500 sitting on a 19% gain for the year.