(Bloomberg) -- Stockpicking hedge funds are coming back into favor for the first time in two years after a turnaround in their performance. 

Equity long-short hedge funds, which make bets on how companies will perform, attracted $1.5 billion in net inflows in February — the first positive reading in 24 months — according to data platform Nasdaq eVestment. The strategy remains the largest in the hedge fund universe, making up more than a fifth of the industry’s overall $3.6 trillion assets under management, numbers published Wednesday show.

“The short in ‘long/short’ was the weak side in the zero-rates environment. With rates higher for longer, dispersion of returns in the stock market will pave the way for better performance versus passive strategies and equity indices,” said Mario Unali, a senior money manager at Kairos Partners, who invests in hedge funds. “Investors are slowly recognizing that, and will keep coming back to this investment style in the next few months.”

It’s a tentative reversal in fortunes for equity long-short funds, which spent several years lagging index gains, particularly in 2022. Hedge fund stockpickers were among the best performers in 2023 and have continued to shine this year, according to data compiled by Bloomberg. Equity strategies returned nearly 7% over the past three months, outperforming the next best — event driven and macro strategies — which returned closer to 4%. 

The hedge fund industry overall made its best performance-driven gains in February since April 2021, Nasdaq eVestment data showed — with long-short equity funds powering much of the rise. 

Citadel’s equities strategy gained 6.3% during the first quarter, while the Schonfeld Fundamental Equity money pool returned 5.9%, Bloomberg News reported. 

All of this has boosted appetite among investors, with a recent survey by BNP Paribas showing that 28% of investors planned to allocate to equity long-short strategies in 2024, second only to credit. 

That said, the month’s inflows don’t do much to reverse the decline of recent years. Equity long-short strategies have lost $70 billion over the past two years, Nasdaq eVestment said.

(Updates to add comment in third paragraph, returns in sixth paragraph.)

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