Institutional investors have long classified long-short equity funds alongside other hedge strategies in a generic alternatives bucket. A new whitepaper from Meketa Investment Group challenges that framing and offers a sharper analytical lens for what the strategy actually does, and does not, deliver. Authored by Frank Benham, CFA, CAIA; Zachary Driscoll, CFA; and Lillian McAughan, and published in September 2026, the paper1 examines long-short equity's history, performance record, return drivers, and role within an institutional equity allocation.
The thesis is clear from the outset: "Long-short equity is best understood as a more flexible form of equity management rather than a separate source of portfolio risk." That positioning has real consequences for how advisors should size, benchmark, and evaluate these strategies.
The Opportunity Set Is Real. So Is the Complexity.
Long-short equity's distinguishing feature is the toolkit it grants managers: short selling, leverage, derivatives, and tactical exposure changes. Each tool expands the opportunity set in both directions. Benham, Driscoll, and McAughan write that this broader toolkit "can expand the opportunity set for skilled investors," while warning that "the same flexibility also increases financing, liquidity, operational, and positioning risks." The paper does not let the promise outrun the peril.
The historical record is instructive, and selectively impressive. Over the period from December 1991 through April 2026, the long-short equity composite produced an annualized return of approximately 10.0%, against 11.0% for US equities, but with materially lower volatility (8.8% versus 15.1%). During the Global Financial Crisis, the composite fell 26.4% while US equities dropped 46.0%. The protection is real. But the recovery lag is equally real: in the year following the GFC trough, long-short returned 25.9% while US equities surged 52.2%.
Structural Drag, Not Manager Failure
Much of the underperformance versus long-only equities over the trailing ten and twenty years reflects structural conditions rather than a failure of the strategy per se. The authors identify four compounding headwinds: an unusually sustained US equity bull market; compressed return dispersion, which narrowed the opportunity for security selection on both sides; non-US equity exposure that lagged domestic markets; and near-zero policy rates that suppressed the return on cash held within long-short portfolios. The subsequent normalization of rates has, as the paper notes, "removed at least one of these headwinds."
The Factor Problem
A critical finding concerns the source of apparent manager skill. Empirical research cited by Benham and colleagues shows that exposure to the broad equity market, combined with a persistent spread between small-cap and large-cap stocks, "together explained more than 80% of the variation in long-short equity hedge fund returns." Price momentum and market trading activity contributed additional explanatory power. The implication is pointed: what appears to be alpha may in many cases be systematic factor exposure. The authors acknowledge that the source of this variation can shift, from small-cap spreads to foreign equity exposure to AI-related themes, but "it often reflects a systematic theme based on what is in or out of favor."
Manager Selection Is the Dominant Variable
The interquartile spread for long-short equity managers over the trailing ten years reached 15.1%, compared to 5.0% for US large cap equity and 6.3% for US small cap equity. This dispersion amplifies both the reward for getting manager selection right and the cost of getting it wrong. Past performance offers limited guidance: the authors write that "performance persistence of hedge funds... have produced mixed results," and that where persistence exists, it "tends to be concentrated among smaller and younger funds rather than the industry as a whole."
The Allocation Question
As equity risk modifier, long-short strategies can reduce overall portfolio beta and drawdown exposure. As the paper frames it, the strategy can adjust "the beta, volatility, and drawdown profile of an equity portfolio, as well as a means of potentially adding alpha." For investors who want to maintain full equity market participation while accessing long-short alpha, an equity overlay is one solution. The real question is whether the identified manager is among those capable of generating durable skill, or simply harvesting factor premia at hedge fund fee levels.
5 Key Takeaways for Advisors and Investors
- Long-short equity belongs in the equity allocation, not the alternatives bucket, because its primary risk driver remains equity market exposure.
- The strategy's most reliable benefit is risk reduction during severe drawdowns, not long-term outperformance of a long-only benchmark.
- A meaningful share of reported long-short returns may reflect systematic factor exposures rather than genuine security selection skill.
- Manager selection is the single most consequential variable, given the wide dispersion of outcomes across the long-short universe.
- Multi-strategy platform costs often exceed their stated fee schedules due to pass-through expenses; investors should obtain a full accounting before committing.
Footnote:
1 Benham, Frank, Zachary Driscoll, and Lillian McAughan. "Long-Short Equities." Meketa Investment Group, September 2026, https://meketa.com/leadership/long-short-equities/.
