Every now and again, an article or piece of research crosses my desk that is so wrong-headed, it demands a riposte.

Today’s deserving article is in the WSJ based on a survey from Citi: Hedges’ Assets: $5 Trillion; with the sub hed Funds May Triple Over Five Years, Survey Says; New Offerings to Stoke Growth:

“The hedge-fund industry may more than double in size during the next five years, to more than $5 trillion in assets, as private fund firms broaden their offerings to compete with traditional money managers, according to a recent Citigroup survey.

The poll of investors, consultants and money managers predicted that hedge funds could lure $2 trillion in new money to investment vehicles long associated with mutual-fund companies and other institutional managers, including “long-only” funds that buy and hold stocks.”

I highly doubt the industry is doubling in size, or that assets will triple. There are a broad variety of reasons:

1. Withdrawals from hedge funds have quickened.

2. Performance over the past decade has been poor, with high correlations and reduced Alpha; WSJ reports that YTD Hedge funds are lackluster performance, following three years lagging behind the overall market—

3. The Hedge fund industry is experiencing a period of consolidation and even contraction

4. Funds of funds are closing rapidly. Over the past month, I have learned of several substantial FoFs that are closing their doors. Some of this is due to Madoff feeder fund issues; others problems are performance, and multi-layered fees.

5. High Fees are causing resistance to stiffen for several key attributes of Hedge Funds: 2& 20% fee structure, extended lock up periods, limited transparency, windows for withdrawals.

Anecdotes are not data, but I cannot help but pass along what I have heard from hedgie friends and colleagues over the past year:

I know of numerous funds under pressure from investors — “I’ll give you one more quarter, but that’s it.”  Several well known Fund of Funds are either closing down or radically making over their models.This is beyond the usual swath of Funds that are so far below their high water mark each year that they dissolve and reform to circumvent that. Some people estimate that as many as 25% of all hedge funds will go away each year (to be replaced  or not).

Raising assets has become increasingly challenging. The ongoing failure of highly pedigreed ex-Goldman traders leaving the nest to launch funds that barely last a year has been regular fodder for the financial pages.

And perhaps most surprising, a number of longstanding funds with successful track records are downsizing or even returning capital to investors and closing down.

There is no doubt that a small number of hedge funds will be very successful. Some of the biggest names continue to demonstrate out-performance, attract new assets, bring in new institutional investors. These are the exceptions, not the typical funds.

It is not a particularly great time to be a fund manager. The days of easy money are over. Attracting clients, raising AUM, generating Alpha have all become increasingly difficult.

The golden age of hedge funds may already be over . . .



Hedges’ Assets: $5 Trillion
WSJ, June 11, 2012

Category: Hedge Funds, Investing, Really, really bad calls

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “No, the Hedge Fund Industry Is Not Doubling or Tripling”

  1. philipat says:

    Hedge Funds are similarly mislabelled as the now infamous JPM “Hedges”. Most Hedge Funds simply don’t hedge. And I don’t need to pay 2/20 to buy AAPL.

  2. CANDollar says:

    Hedge funds are just very expensive beta. FoFs can be worse because of fee overlays.
    There is a niche in some strategies that have a mechanical nature (managed futures, fixed income arb) that can be executed very low cost, even as ETFs.
    And pension funds will continue to seek the big guns with a track record.

  3. dead hobo says:

    With 2 & 20, during periods of extreme volatility do investors have to pay the 20 over the same gains multiple times? For example:

    Q1 Gain 1000: pay 200 & management fees
    Q2 Loss 1000: pay management fees
    Q3 Gain 1000 back: pay 200 & management fees

    Mathematically, that’s almost a 50-50 split in this example. If this is how it works, why on Earth would anyone agree to a fee structure like this?

    BR: No, there is a high water mark for the 20% performance fee

  4. BR,

    maybe ‘Articles’, like the one in the WSJ, are, merely, agitprop–to soften up, yet, more ‘Marls’ for ‘action’ like..

    “Mariner Investment Group LLC, a hedge fund founded by a former Bear Stearns Cos. fixed-income executive, charged South Carolina’s pension fund more than any other manager while delivering returns that trailed competitors.

    Mariner, started by William Michaelcheck, 65, got $38 million in fees from the South Carolina Retirement Systems in fiscal 2011, or 16 percent of all the compensation paid to the fund’s money managers, which totaled $239 million, according to pension officials.
    Enlarge image Hedge Fund Got Most South Carolina Fees While Lagging on R

    “We take the risk and we pay the fees, but we don’t get the reward,” said South Carolina Treasurer Curtis Loftis, pictured. Photographer: David Goldman/AP Photo

    The performance of Mariner’s investments for South Carolina lagged behind those of managers such as Bridgewater Associates LP, the world’s biggest hedge fund by assets. Mariner funds returned from 2 percent to 13 percent last year, while Bridgewater’s delivered 17 percent to 24 percent. Bridgewater collected $25 million in fees, or 34 percent less than Mariner, while managing $1.3 billion in assets compared with Mariner’s $930 million. …
    By Martin Z. Braun – May 25, 2012 12:01 AM

  5. cynical says:

    Isn’t obvious that if a hedge fund is raising long-only it is a mutual fund not a hedge fund. The point of a hedge fund is wide (or wider) discretion. Who cares about the name on the door. If it walks and talks like mutual fund it is.

  6. machinehead says:

    In a world of low single-digit yields and dividends, a 2/20 fee structure represents guaranteed underperformance of benchmarks for the majority of hedge fund investors.

    As P. T. Barnum never tired of urging the rubes, ‘This was to the egress!’

  7. speaking of Barnum..

    this..”…to soften up, yet, more ‘Marls’…”

    ‘Marls’, should have been ‘Marks’ ..


  8. NoKidding says:

    Title: “Hedges’ Assets: $5 Trillion; with the sub hed Funds May Triple Over Five Years”

    Leaves me thinking we have a $5T industry that could grow to $15T. No way, too big!

    Read on: “The hedge-fund industry may more than double in size during the next five years”

    Wait a minute, you just told me it may triple over 5 years, not double. Whats with that?

    Read on: “to more than $5 trillion in assets”

    Oh then you mean they may either double from 2.5T, or triple from 1.6T. OK I guess.

    Read on: “The poll … predicted that hedge funds could lure $2 trillion in new money”

    Wait a minute, if the result is more than 5T, and the addition was 2T, then the start was more than 3T!
    That means it would be neither a double nor a triple, but a 60 percent increase, max.

    Be nice to get at the actual numbers. Bet I need Google for that. Wonder why nobody buys newspapers? Math illiterate dipschitz.

  9. robertso2020 says:

    What prominent FoF’s are closing?

  10. BR–had an interesting discussion over the weekend regarding advantages of public markets with some people who are considering taking their companies public. They believe the traditional advantage of public markets–liquidity–no longer exists, as liquidity in private mkts is so much better. I argued back that the multiple is the real advantage, particularly in certain industries, and couldn’t overcome the Facebook example. Is this a real trend or a product of too much PE money with soon-to-end investment periods?

  11. VennData says:

    Speaking of Barnum….

    I can’t wait to see these Hedge Fund clowns in the blue hair and big floppy shoes start ADVERTISING:

    “Come one, come all step right up to the Carney People Fund.”

  12. [...] that the amount of money managed by hedge funds could soar to $5 trillion over the next five years. Barry Ritholtz certainly saw it, and responded with derision: “I highly doubt the industry is doubling in [...]

  13. idaman says:

    what struck me as the % of institutional allocated investments that has moved from long only equity portfolios to real assets and hedge funds.

    when this global credit crisis eventually ends, there will be less demand for equities than before the crisis began. Couple that with retail investors permanent risk off and distrust of wall street (Lehman, Facebook, 99%, etc.) and that’s a big head wind for any future bull market.

  14. John Mauldin says:

    But on the other hand

    The JOBS act is going to be killer marketing for Hedge Funds. Stand back and watch. I mean really killer, unless it gets ring-fenced by the SEC, which is possible. We just don’t have any idea how they are going to write the new rules. I mean not a clue from any of my usually best, wired at the top sources. Which may mean they are still working on it or are just being very good at keeping it under the radar.

    And more and more hedge funds are now in mutual fund wrappers, even with those high fees It is going mainstream. One more recession like 2001 and it will double easily. Another like 2008? Look out below. Stay tuned.

  15. streeteye says:

    The mutual fund business model of fees of 1-2% on assets is imperfectly aligned with investors, since it encourages the fund to get as big as possible, which hurts performance.

    The hedge fund model is better aligned, but 2 and 20 is very expensive, it really only makes sense for superstars with a proven record of consistent outperformance.

    HFs also have an unstable business model. A fund can do great for years, it falls below the watermark for 2 years, and all the best analysts and traders leave for other funds or to start their own.

    Prior to 2000, HFs had a scale disadvantage in asset-gathering and technology, and it was really only superstars. They did very well following the popping of the bubble, and the Internet and prime brokers really meant a small shop was no longer at any major disadvantage.

    Then HFs got overhyped, they didn’t do great in the financial crisis (although better than a lot of banks, broker-dealers, insurance companies, S&Ls that acted like HFs). But the HF model makes sense for superstars and less liquid but potentially lucrative strategies that benefit from a lockup and diminished incentive to get big.

    There has been a trend to lower fees for investors who agree to longer lockups, and ‘modified high water mark’, where instead of withholding incentive fees until you recover the high water mark, the manager for instance gets half the usual incentive until he made back double the amount lost.

    Technology is great for boutiques vs. big firms, whether it’s access to algo trading, access to management via Internet prezis and reg FD, Internet asset gathering. HFs will be around wherever active management is around, but the business model will evolve.

  16. cognos says:

    Well… so we are all subject to the basic on monetary issues… sig inflation raises nominal #s, deflation lowers nominal #s and has a tendency to cause painful spirals, large persistent unemployment, etc. (see “General Theory).

    HFs are fair, effective, highly competitive investment vehicles. Those of you who don’t know that are paying attention to the wrong journalists… keep in mind many of the best HFs do not want to share information. Journalists are mainly lazy and use “databases”, pensions funds are typically undesirable investors for the best HFs (too much discloure, too long and extensive diligence cycles… thus they invest in “institutionalized” funds, not performers), etc. Because of these reasons… easily “researchable” performance on HFs may be understated.

    Soros has roughly $25bln on personal assets (seriously) after only making his (f-ing) money from investor fees in a performance environment AND donating extensively (Ive heard as much as $500mln annually). Imagine the taxes! Imagine the investor profits!

    And his is not even close to the “top ranking” fund… SAC, RenTec and Bridgewater are the public 1-2-3. There are other quieter private vehicles, while of less size… of roughly the same “30% per year for 30 years, few losses” kinda returns and in some cases doubtless even better.

    Again… in the HF industry… its “the quieter, the better”. (PS – I worked for a fairly quiet $10bln ish hedge fund… which shut down in the past few years, sent ALL that money back to investors, and the head manager retired far richer than anyone knows. He is on no public lists, but probably should be. The main fund returned about 15% net over the past 10 years… with only small losses, down about 9.5% in 2008.)

    As far as “total assets”… it seems logical that the premium paid to “alpha” attempts should stay roughly in the same proportion as “risk assets”. The biggest thing that would drive hedge fund assets, then… is the value of worldwide risk assets.

    Risk now that is depressed… by deflation? (I think) by demographics (also likely… due to boomers) and by natural human investment cycles. Will that recover? Will equities and risk assets boom? If so, $5T is quite logical (and small… globally).

  17. Reuters says:

    Hedge Funds Saw $5 Billion Outflow in April: TrimTabs
    Tuesday, June 12, 2012

    NEW YORK (Reuters)—Hedge funds lost $5.1 billion to outflows in April, reversing inflows of $2.8 billion in March, as persisting uncertainty in the euro zone affected investors worldwide, according to TrimTabs-BarclayHedge.

    The outflows amount to 0.3 percent of total industry assets, which increased 1.6 percent for the first four months of 2012 to an estimated $1.7 trillion, the research firm said.

    Hedge funds fell 0.59 percent in April but outperformed the S&P 500 stock index’s 0.75 percent drop, marking the first time in six months that the industry outperformed that benchmark, BarclayHedge founder and President Sol Waksman said. Still, the industry’s 5 percent gain for the first four months trailed the S&P 500′s 11.2 percent gain over that period, the research firm added.

  18. abravo says:

    From my analysis of our hedge fund portfolio, on average L/S funds take about 1/3 of gains over time, most other strategies take about 40%. Most hedge funds also charge expenses so the 2/20 in reality become 3/20. There are a few whose fees are so extreme (greater than 2/20) that they take almost 50% of profits.

  19. [...] future of hedge funds.  (Felix Salmon, Barry Ritholtz, [...]