Stock-picking hedge funds are suddenly back in vogue after years of getting battered. Here are the areas attracting the most investor interest.

By Bradley Saacks

As the markets deal with a never-before-seen pandemic, hedge-fund investors want to go back to the old-school way of investing.

Money has flowed out of long-short equity funds, the most popular type of hedge fund in the industry, for years, including more than $22 billion in 2019, according to Hedge Fund Research. Investors were uninterested in paying high fees for equity managers when the markets churned upward in the long-running bull market and passive index funds gained market share.

Now, hedge-fund investors are getting back to the fundamentals. The market disruption and ensuing reopening create an opportunity for stock-pickers to pick the winners and losers, said Marcus Frampton, chief investment officer of the Alaska Permanent Fund, a sort of sovereign wealth fund for the state that manages around $60 billion.

"It's a more ripe alpha environment than what it was 10 years ago," Frampton said on a webinar in June hosted by consultancy Agecroft Partners. 

Market-neutral funds, which hold longs and shorts in closely related stocks to protect against market moves, in particular struggled during the bull market, but investors expect renewed interest in managers that can generate, and calculate, alpha. 

At Albourne Partners, which works with institutional investors across the world to find managers, there's "more interest in market-neutral funds than there has been in the last 10 years," said Julie Lauer Wurster, a due diligence analyst for the London-based consultancy, on the webinar. 

Equity market-neutral funds have held up well in the pandemic, according to Hedge Fund Research. The average market-neutral fund has lost 2.8% through April, while the average equity fund fell more than 8% through the same time period. 

Lauer Wurster highlighted two additional areas of interest from Albourne clients: sector-specific funds, in areas like healthcare and technology, and equity funds focused on the Chinese market. A former Citadel portfolio manager, Prashanth Jayaram, is in the process of raising money for a healthcare-focused fund called Tri Locum Partners. 

The biggest draw for her clients is the ability of fundamental equity managers to "act quickly in the new COVID environment" — especially compared to quants, which were caught flat-footed in a disastrous March. 

Even with the fundraising environment riddled with challenges, as the virus halts business travel and in-person meetings, allocators expect market-neutral funds and other equity funds to be launched during this time. 

Bill Li, director of portfolio completion strategies at MassPRIM, which manages pension assets in Massachusetts, said that even managers that lost money can get money from platforms like his, which have an emerging manager program.

"Everyone makes mistakes. It's about what you learn from them," he said.