- Industry faces ‘day of reckoning’ that will be painful: James
- Hedge-fund fee structure is hard to justify, billionaire says
The $2.9 trillion hedge-fund industry may lose about a quarter of its assets in the next year as performance slumps, said Tony James, Blackstone Group LP’s billionaire president.
“It’s kind of a day of reckoning that we face here,” James said Wednesday in an interview with Bloomberg TV Canada’s Pamela Ritchie at a conference in Toronto. “There will be a shrinkage in the industry and it will be painful. That’s going to be pretty painful for an awful lot of places.”
The hedge-fund industry is having its worst start to a year in performance and investor withdrawals since global markets reeled after the financial crisis. Third Point, the hedge-fund firm founded by Dan Loeb, last month said the industry is in the first stage of a “washout” after “catastrophic” results this year.
Hedge funds have lost 1.8 percent this year, according to Hedge Fund Research’s global index, the poorest performance since 2008. The industry had net outflows of $16.6 billion in the past two quarters, the most since 2009, according to HFR. In 2015, 979 funds closed, more than any year since 2009, according to the research firm.
Blackstone is the largest allocator to hedge funds globally, and the New York-based firm also provides startup money to managers and buys equity stakes in hedge-fund firms. Results in its hedge-fund business are better than the industry average, James said, though performance generally remains a cause for concern.
“We’re definitely worried about what’s going to happen in the hedge-fund world right now,” he said, speaking at the Canadian Venture Capital and Private Equity Association’s annual conference.
Hedge-fund managers have been stymied by central bank stimulus worldwide, declining trading volumes and markets marked by wide swings in prices. Carlyle Group LP’s David Rubenstein said this month he was surprised that “so many macro people got it wrong.” Carlyle owns three hedge-fund firms and last week said Mitch Petrick, the head of the unit that houses the firms, stepped down.
James said hedge funds may be expected to under-perform the stock market during a bull run because they’re hedged to reduce volatility. Blackstone’s fund of hedge funds has about one-fifth of the volatility of the stock market and about 65 percent of the upside, he said.
“For a while that’s a good trade for them,” James said of investors in hedge funds. “But the longer that bull market goes, they fall further behind. Pretty soon, they don’t like that trade anymore.”
James also called out hedge-fund managers for the fees they charge, which are typically 2 percent of assets annually and 20 percent of investment profits -- a structure he said “is hard to justify these days.” Billionaire Warren Buffett last month described such fees as “a compensation scheme that is unbelievable,” and Bill Gross of Janus Capital Group Inc. said on Twitter: “Hedge fund fees exposed for what they are: a giant ripoff.”
Tudor Investment Corp., one of the oldest and most expensive hedge funds, is trimming fees, according to a letter sent to clients this week. The $11.6 billion firm, run by billionaire Paul Tudor Jones, will reduce fees for a share class that contains most of its biggest fund’s money to 2.25 percent of assets and 25 percent of profits starting July 1. That’s down from 2.75 percent and 27 percent.
“We’re talking about three years of under-performance, the fact that investors pulled $1 billion of capital and already a 2-and-20 fee structure which is under duress,” Ilana Weinstein, the chief executive officer of IDW Group, which recruits investment professionals for hedge funds, said of Tudor. “Investors aren’t really excited about a slight discount for crappy performance.”
“There’s going to be a real weeding out of hedge funds,” she said Wednesday on Bloomberg TV.
Blackstone in 2014 embarked on a new strategy to bring some traders in-house. The move has been enabled by a talent drain coming out of banks and other institutions, James said, where proprietary trading has been hampered by regulation after the financial crisis.
“We take these really remarkable talent and we can pick just a couple dozen out of thousands out there and put them in business,” he said. “They’re actually working for themselves yet we’re the ones who give them capital, tell them what they can and can’t do.”
His comments contrast with those made earlier this month by billionaire trader Steve Cohen, who said he’s “blown away by the lack of talent” in the industry.
Cohen, who spoke at the Milken Institute Global Conference in Beverly Hills, California, said the business has “gotten crowded” with too many managers following similar strategies. Hedge funds seem to think that by hiring skilled people, they can “magically” generate returns, he said.
Blackstone had $68.5 billion dedicated to hedge funds as of March 31, and the business produced $244 million in economic income, which includes realized and unrealized gains and losses, in the past year, down 35 percent from the previous 12 months. The alternative asset manager, run by James and CEO Steve Schwarzman, oversaw $344 billion in real estate, private equity holdings, credit assets and hedge funds at the end of the first quarter.
Peter Grauer, chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director at Blackstone.