Hedge Funds Specialising in Long-Short Equity See Strongest Returns Since 2020 Amid Market Volatility

Hedge funds worldwide specializing in long-short equity strategies saw their strongest average returns since 2020 in 2024, according to a report from Reuters, referencing a client note by Goldman Sachs. The improved performance was largely attributed to consistent returns despite the volatility of the markets.

These hedge funds posted a weighted average return of 12.75% in 2024, showing a notable improvement over the prior year. However, this still trailed behind benchmark indices such as the S&P 500, which surged over 20% in 2024 and posted a two-year growth of about 53%, marking the best consecutive performance since 1998.

In comparison, fundamental equity hedge funds reported a higher weighted average return of 22.53% in 2020, as noted in a Goldman Sachs report from December 2022. Unlike broad market indices, these hedge funds use both long and short strategies—investing in stocks they expect to rise while betting against those they believe will fall. However, this approach presented difficulties in 2024, as short positions began to underperform after July, according to data from Goldman Sachs.

In addition to fundamental equity funds, systematic funds—those that rely on algorithmic trading driven by market signals rather than individual company fundamentals—also had a strong year. These funds delivered returns around 20% in 2024, their best performance since 2022. These systematic strategies typically rely on quantitative models to identify trends, which helped them navigate a turbulent market environment.

Goldman Sachs also noted that global hedge funds ended 2024 with elevated leverage levels. Gross leverage, which accounts for both investor capital and trading positions, increased to 190%. Meanwhile, net leverage—reflecting the difference between long and short positions—reached 56%. Both figures were higher than those seen in 2023, which closed with 178% gross leverage and 50% net leverage. This rise in leverage suggests that hedge funds were becoming more confident in their strategies and increasing their exposure to market opportunities, even amid uncertainties.