Long/Short Equity Hedge Funds Make a Comeback

Long-short equity hedge funds are mounting a comeback after years of redemptions and waning allocator interest. Inflows have turned positive in 2025, with eVestment data showing that stock-picking hedge funds drew $22.8 billion in Q1 alone, their strongest quarter. Hedge Fund Research similarly reported that long-short equity funds added roughly $10 billion of net inflows in the first half of 2025, reversing a decade-long pattern of attrition. The shift marks an important inflection for an industry segment that struggled to justify its role during the beta-dominated years of post-crisis quantitative easing.

Volatility and Dispersion Reignite the Case for Stock–Picking

The drivers of this reversal are rooted in today’s market environment. Volatility has returned as a persistent feature, with tariff headlines, policy uncertainty, and geopolitical disruptions pressuring equity markets. At the same time, sector dispersion is widening, particularly between beneficiaries of the AI and technology wave and lagging defensives. In this environment, allocators are rediscovering the appeal of long-short equity fund strategies that can hedge, express conviction in both directions, and capture idiosyncratic opportunities amid shifting macro conditions.

This is not the first time long-short equity has benefited from macro conditions. Periods such as the post-dotcom recovery and the years immediately following the global financial crisis saw similar spikes in volatility and dispersion that rewarded active managers.

Performance Divergence Underscores Manager Selection

Results across long-short equity funds have diverged significantly in 2025. Several managers have delivered substantial gains, supported by exposure to AI-linked equities and the use of hedges that limited losses during market pullbacks. In contrast, funds with portfolios more closely aligned to index performance have lagged. The April 2025 sell-off erased year-to-date gains for many funds, underscoring that success is far from uniform.

UBP’s Q2 data showed that long-short equity strategies gained 7.6%, with directional approaches significantly outperforming market-neutral ones. That variance highlights the importance of manager selection: the opportunity set is growing, but outcomes remain highly differentiated. For allocators, this underscores that alpha in today’s environment is less about broad equity exposure and more about choosing managers with the discipline to manage risk and the flexibility to act on conviction.

Institutional Allocators Signal Renewed Conviction

Institutional sentiment is continuing to shift toward long-short equity as a core allocation. According to the Hedgeweek AIMA mid-year allocator survey, long-short equity ranks among the most favored strategies, alongside global macro and market-neutral, as allocators seek liquid, alpha-generating approaches that can stand apart from directional equity markets. Also, as noted by the FT, Norway’s $1.7 trillion sovereign wealth fund made its first allocation to external long-short equity funds, according to the Financial Times. The fund awarded mandates of roughly $250 million each across U.S. and European strategies.

For such a conservative allocator, the decision reflects recognition that these strategies can provide liquid, alpha-driven exposures at a time when private markets are facing bottlenecks and slowing distributions. Rising interest is not limited to niche allocators; the trend reflects a growing institutional consensus that long-short equity should play a prominent and liquid role in diversified portfolios.

Private Markets Stumble as Long–Short Gains Ground

The renewed focus on long-short equity is taking shape as private markets remain constrained by liquidity challenges. With exit activity slowing and capital locked in continuation vehicles and discounted secondaries, allocators reevaluate how much illiquidity they can carry in portfolios. By contrast, long-short equity funds can adjust exposures quickly, manage drawdowns, and capture opportunities as conditions change. The divergence in flexibility has made long-short equity more attractive this year. It reinforces the strategy’s role as a liquid complement to private market investments.

While overall private market fundraising has slowed, sectors such as infrastructure, energy transition, and secondaries remain resilient; at the same time, allocators recognize that long-short equity carries its own risks, including correlation spikes during market stress and the potential for style drift that requires vigilant oversight.

Risks of Crowding and Style Drift

Crowding in AI and large-cap technology is a notable risk, with some funds holding significant positions in companies such as Nvidia, Microsoft, and Alphabet. A change in sentiment toward these names would test even strong performers. Style drift and leverage also require close oversight, and allocators continue to push for greater transparency and alignment on fees. At the same time, the strategy set has evolved: customized structures, SMAs, and stronger governance are now more common, addressing many of the concerns that previously constrained allocations.

A Durable Revival or Tactical Bounce?

The key question is whether the current resurgence is cyclical or structural. The conditions that support long-short equity, volatility, dispersion, and macro uncertainty are unlikely to fade quickly. Geopolitical tensions, diverging central bank policies, and sector-specific dislocations suggest that stock-picking skills will remain critical to portfolio outcomes.

History offers useful parallels. After the dotcom bubble, allocators who increased long-short equity allocations benefited from a decade of strong relative performance. By contrast, the era of zero interest rates and quantitative easing that followed the global financial crisis reduced volatility and compressed dispersion, creating a more challenging environment for stock-pickers. The present cycle appears closer to the former: fundamentals matter again, and dispersion widens, creating fertile ground for active equity strategies.

The Bottom Line

For allocators, this implies that long-short equity deserves renewed consideration not only as a tactical response to current volatility but also as a structural allocation within diversified portfolios. If volatility and dispersion prove durable, long-short equity may be positioned to reclaim its role in earlier cycles, delivering differentiated returns and serving as a liquid counterbalance to illiquid alternatives.

To learn how these market trends might affect your investment strategy, consult with an experienced Arootah Advisor. Schedule your discovery call today to get started!