The hottest hedge fund strategy tells you everything you need to know about markets right now
Deutsche Bank found that the "most in-demand" strategy right now is the equity market neutral strategy.
Approximately 32% of the respondents said they are increasing their exposure to fundamental equity market neutral managers, up from 17% in 2015. A further 18% of the allocators are increasing their exposure to to systematic equity market neutral funds, up from 11% in 2015.
Citadel, the giant hedge fund led by Ken Griffin, is one fund that employs the strategy. AQR launched an equity market neutral fund in 2014, while Chicago-based Alyeska Investment Group is another fund in this space.
Investors had been underweight the strategy, according to Marlin Naidoo, head of capital introduction and hedge fund consulting in the Americas for Deutsche Bank.
"2015 was a year where we saw some good performance coming out of equity market neutral and the quantitative equity market neutral space as well," Naidoo told Business Insider.
"It's not unusual to see strategies that performed well become the more favored strategy in the next year," he said.
"Typically, market neutral managers tend to have more diversified portfolios with more names. Investors are utilizing that diversification to manage a volatile environment," Naidoo said.
These sorts of hedge funds take long positions in stocks they think will outperform the market, and short positions in stocks they think will underperform, and aim to hedge out broader market moves.
In finance lingo, they aim for a beta to equity markets of zero. That's appealing to investors when the market is volatile.
All that said, there aren't many true equity market neutral funds out there. There may be only a couple dozen true fundamental equity market neutral funds with $1 billion-plus in assets under management.
Despite hedge funds as a group having a terrible year in 2015 and a brutal start to 2016, money continues to flow into the industry.