Finance

Michael P. Regan is a Bloomberg Gadfly columnist covering equities and financial services. He has covered stocks for Bloomberg News as a columnist and editor since 2007. He previously worked for the Associated Press.

As anyone who's still stuck at work reading this knows, this is Memorial Day weekend -- when we're all supposed to remember veterans or something, I forget exactly.

But this is America, darn it, and you can spend the holiday remembering whatever you want. Me? I'm going to remember the "heyday of the hedge fund." Because if there's one thing I learned reading the financial news this week, or all year for that matter, it's that the heyday of the hedge fund may very well be over. It's hard to say for sure, since not many are brave enough to come right out and say so. But the question lingers in the air like a chemtrail over the entire industry.

NPR's Marketplace recently asked: Is the heyday of hedge funds over? Tom Keene asked Ilana Weinstein: Is it game up for hedge funds? 

Is the Hedge Fund Heyday Over?
Who knows. But the HFRX Global Hedge Fund Index's heyday was over in 2007, around the time you could get a good deal on Kenneth Cole's "Hedge Fund Loafers"
Source: Bloomberg

There was plenty of news this week to make you wonder if it is, indeed, midnight in the garden of the hedge fund heyday. Insurers are yanking money out of them faster than they yank your homeowner's policy when you set up a trampoline for the kids. Even the queen of the commodities, Leda Braga, reportedly lost 7 percent in April as her $5 billion BlueTrend fund sang the blues. Blackstone's president predicted funds will suffer the same fate as George Costanza in the Hamptons: shrinkage. It's gotten so bad, Saijel Kishan reports, that Paul Tudor Jones is throwing a sale. He's cutting fees to a low, low 2.25 percent of assets and 25 percent of profits. We're practically giving it away!  

So is the heyday of the hedge fund over?

Ken Griffin said the heyday of hedge funds was over way back in October 2008, and who can blame him since it seemed like the heyday of capitalism itself was over then. Some think the heyday's dusk was in the spring of 2007, when Kenneth Cole marked down the price of its "Hedge Fund Loafers" by 25 percent. But, c'mon, a $100 pair of Kenneth Cole shoes? Those sound more like Pension Fund Loafers, at best. Some even said the hedge fund heyday may have ended in 2006, when Amaranth Advisers flared off $6 billion because of bad natural-gas bets. (Attention millennials: If you're an enthusiast of the hedge fund arts but were too busy tending to your MySpace page back then, you really should read up on Amaranth. If ever there was a heyday of hedge fund blowups, that was it. Or maybe it was 1998.)

"Why do I think the hedge fund heyday is over?" was what John W. Rogers Jr. asked in 2010 at Forbes. His answer:

First, the myth of Superman has passed. Yale’s endowment, known for its hedge fund returns, lost nearly 25% in 2009, and hundreds of hedge funds went bust in the financial crisis. People may recognize that while some skilled and lucky managers make billions, most hedge fund investors don’t profit similarly. I definitely agree with Warren Buffett, who in 2008 bet $1 million that an index fund would beat ten hedge funds over a decade with fees included.

Not half bad. Buffett probably will win that bet. But the myth of Superman is over? Take it easy there, General Zod. As for Yale's Superman, David Swensen, he's still generating headlines like this week's "Yale Has $26 Billion Socked Away Thanks to this $5 Million Man."

Still, for those who were still wondering if the hedge fund heyday was over, there appeared to be confirmation in 2011. However, Yves Smith found herself wondering in February 2014: Is the heyday of hedge funds over? And the question on another blogger's mind in October 2014? You guessed it: Is the hedge fund heyday over?

Of all the hedge fund heyday ruminations of this particular week, my favorite was Sonali Basak's Q&A with AIG's hedge fund heartbreaker Doug Dachille, who's been churning out redemption notices to the tune of $4.1 billion. I like Dachille because he communicates in wacky analogies, much like myself. We're like the Wonder Twins of wacky hedge fund analogists.

Sonali asked him how he picks funds, and he had a good analogy handy: "It's like choosing your spouse." Sure! Who among us doesn't remember dad saying something like, "You see kids, I knew it was love at first sight the moment I laid eyes on your mother's Sharpe ratio." So why is Dachille divorcing so many of the spouses he's collected in his hedge fund harem? He's got a great analogy about food. Like many divorces, his seem to center around poor performance in the most important room of the house for a marriage (the kitchen). Take it away, Doug:  

It’s like risotto with truffle sauce. There’s the truffle sauce. There’s very little of it to go around, and they want to sprinkle it on top of the rice because the rice is cheap and easy to get. So the original fund generated huge returns, and they were very successful. But they realize it’s a $2 billion fund and they can’t grow that to $10 billion. So what do they do? They start adding all these other funds. And they just sprinkle a little of the extra of the return from the original fund on top of things that are easily scalable. 

This Trade of the Week is for you, Doug Dachille. Thanks for proving it's still High Noon in the heyday of the hedge fund analogy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

(Corrects pronoun for Yves Smith in ninth paragraph.)

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net