Do long-only hedge funds exist? No, assert some in the industry as an increasing number of hedge fund managers nevertheless launch long-only funds. "A hedge fund cannot be long-only and that is that," says one manager. "It's like Ferrari saying they're a horse-and-cart business."
It's easy to see why some hedge fund managers have taken offence. They've spent the past 10 or so years looking for cutting-edge trading strategies and now along come a handful of managers offering an unoriginal approach and winning their business.
Yet if one considers general definitions of a hedge fund (of which there are many) the answer is that a long-only strategy is indeed possible. Hedge funds differentiate themselves from mutual funds by being investment companies that use techniques such as borrowing money or selling short in order to maximize absolute returns rather than relative returns. In the case of long-only funds run by hedge fund managers, these criteria still apply. Managers are borrowing money to buy stocks with the aim of providing absolute returns.
The confusion is among investors. They hear long-only and feel comfortable. It's an area they are familiar with, and here are hedge fund managers, known for their ability to produce returns in a difficult market, now offering long-only products. Oh, okay, they're charging 1.5% fees, but positive returns are certain, surely...?
But what investors don't automatically realize is that the long-only fund run by traditional house Acme Asset Management bears little resemblance to the long-only fund run by hedge fund Acme Capital. With the latter, the investor is relying on the skills of the manager to pick a handful of stocks that he feels will rise in value regardless of market direction. And although hedge fund managers are not known for their modesty, that is still quite a talent to profess to have. If they get their small stock selection wrong and the market takes a downturn, investors will quickly begin to wish they had stuck with Acme AM.
It's important that the differentiation is made. So regardless of definitional technicalities, if some hedge funds want to call themselves "long-only", then so be it.