Investor interest in long/short equity strategies appears to be making a comeback as market volatility and stock dispersion – driven in part by higher interest rates – create fresh opportunities for active managers. According to MandateWire of the Financial Times, Norway’s sovereign wealth fund made its first external allocation to a long/short strategy in January and is now exploring additional mandates for other long/short equity managers.
Norges Bank Investment Management (NBIM), which oversees Norway’s sovereign wealth fund managing the country’s oil and gas revenues, currently allocates approximately $90 billion to external fund managers. While NBIM works with 110 external managers running long-only strategies, it hopes that new long/short equity mandates will generate returns exceeding the current external managers’ long-term average of 1.8 percent above the benchmark per year after fees. NBIM already manages long/short equity strategies in-house.
“We are currently evaluating long/short strategies in Europe and the US,” Erik Hilde, Global Head of External Strategies at NBIM, told MandateWire. According to NBIM’s public invitation to tender, the fund plans to award mandates across long only, alpha extension, long/short, and market-neutral strategies for listed equity markets, with initial funding for each mandate ranging from $150 million to $500 million. The focus areas include locally based managers in emerging markets running single-country products, emerging managers in both emerging and select developed markets, and sector-specific strategies. Specifically, NBIM is looking to allocate mandates to single-country long/short equity strategies in Australia and Japan, regional long/short strategies focused on Europe, and both single-sector and multi-sector long/short equity strategies.
“We are currently evaluating long/short strategies in Europe and the US.”
Erik Hilde, Global Head of External Strategies at NBIM.
NBIM’s move comes amid rising concerns among investors over stretched equity market valuations, particularly in the United States, and growing skepticism about whether long-only equity exposure can continue to deliver the strong returns seen in recent years. The mandates will be managed through Separately Managed Accounts, with Hilde noting that managers will take short positions by borrowing stocks from NBIM’s extensive index portfolio to sell in the market. Managers would short stocks “exposed to high valuations, fraud, and unsustainable business models,” he added.
According to MandateWire, NBIM has yet to determine the number of mandates it will award, as this will depend on the quality of the managers who apply. NBIM is focusing on smaller, privately managed firms, as they “more often have a higher excess return than larger ones because of a better alignment of interest, a compensation structure strengthening this alignment, and being better at attracting, retaining and growing talent.” The investment process begins with submitting a request for investment (RFI), followed by on-site meetings with promising managers, questionnaires, and additional operational and compliance due diligence.
NBIM’s focus on long/short equity strategies signals a broader trend among institutional investors looking to diversify their equity exposure and capitalize on increased market dispersion to enhance returns. With rising concerns over stretched valuations and increased market dispersion, the appeal of equity long/short strategies appears to be growing. As NBIM evaluates new mandates, its shift could lead to greater capital flow into long/short equity strategies, already the largest strategy category by assets under management in the hedge fund industry.
