Investor appetite for hedge funds has waned after too many managers started such vehicles in the past decade, Oaktree Capital Group LLC’s Howard Marks said.
“People have grown appropriately skeptical,” the billionaire investor, whose firm doesn’t manage hedge funds, said Thursday when asked about the $2.9 trillion industry on an earnings conference call. “The performance of the greatest hedge funds, run by geniuses, created a huge umbrella over this industry, which permitted the other 9,990 hedge fund managers to start hedge funds and command hedge fund fees.”
Investors pulled $8.2 billion more from hedge funds in the second quarter than they put in, making it the third consecutive quarter of net outflows, according to data compiled by Hedge Fund Research Inc. and released in a report last week. The industry had about 10,000 funds and funds of funds as of the second quarter, compared with about 7,400 in 2004, when Marks wrote a memo to clients titled “Hedge Funds: A Case for Caution.”
Hedge funds have returned 1.4 percent this year, according to the HFRI Fund-Weighted Composite Index. Annual returns since 2004 have ranged from negative 19 percent in 2008 to 20 percent in 2009.
“I dare say that the average hedge fund performance since 2004 has not warranted the average hedge fund compensation,” Marks said. “At the margin the appetite for hedge funds has been correcting. There was never anything about the term ‘hedge fund’ that produced instant magic.”