The Incredible Shrinking Hedge Fund

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You’d be forgiven for thinking the hedge fund industry might be starting to rebound. Industry assets are at a record $3.2 trillion this year, and a brand-new firm just brought in an unprecedented $8 billion.

But the reality isn’t so rosy. Funds, on the whole, are seeing outflows for the second time in three years.

Melting Ice Cubes

Once high-flying powerhouses run by David Einhorn, Bill Ackman and Alan Howard are mere shadows of their former glory after posting years of returns that ranged from uninspiring to downright awful. John Paulson has crashed so badly and seen assets plummet so far that he’s largely left managing his own money.

Assets Under Management:

Peak

Current

Paulson

John Paulson

2011 $38B

Pershing Square

Bill Ackman

2015 $18.3B

$8.7B

$7.5B

Brevan Howard

Alan Howard

2013 $40B

Tudor

Paul Tudor Jones

2008 $22B*

$7B

$6.4B

Discovery

Rob Citrone

2014 $15B

Fir Tree

Jeff Tannenbaum

2015 $13B

$3.8B

$5.3B

Mason Capital

Michael Martino/

Ken Garschina

2015 $9B

Greenlight

David Einhorn

2015 $12B

$2B

$2.5B

Convexity

Jack Meyer

2013 $15B

Kingdon

Mark Kingdon

2007 $7B

$1.6B

$1.2B

Tricadia

Arif Inayatullah/

Michael Barnes

2015 $4B

Litespeed

Jamie Zimmerman

2014 $3.4B

$303M

Closed hedge

funds in 2019

Assets Under Management:

Peak

Current

Brevan Howard

Alan Howard

2013 $40B

Paulson

John Paulson

2011 $38B

Tudor

Paul Tudor Jones

2008 $22B*

Pershing Square

Bill Ackman

2015 $18.3B

$8.7B

$7.5B

$7B

$6.4B

Mason Capital

Michael Martino/

Ken Garschina

2015 $9B

Discovery

Rob Citrone

2014 $15B

Fir Tree

Jeff Tannenbaum

2015 $13B

Greenlight

David Einhorn

2015 $12B

$3.8B

$2B

$2.5B

$5.3B

Convexity

Jack Meyer

2013 $15B

Tricadia

Arif Inayatullah/

Michael Barnes

2015 $4B

Kingdon

Mark Kingdon

2007 $7B

Litespeed

Jamie Zimmerman

2014 $3.4B

$1.6B

$1.2B

$303M

Closed hedge

funds in 2019

Assets Under Management:

Peak

Current

Brevan Howard

Alan Howard

2013 $40B

Paulson

John Paulson

2011 $38B

Tudor

Paul Tudor Jones

2008 $22B*

Pershing Square

Bill Ackman

2015 $18.3B

Discovery

Rob Citrone

2014 $15B

Fir Tree

Jeff Tannenbaum

2015 $13B

$3.8B

$8.7B

$7.5B

$5.3B

$7B

$6.4B

Mason Capital

Michael Martino/

Ken Garschina

2015 $9B

Convexity

Jack Meyer

2013 $15B

Greenlight

David Einhorn

2015 $12B

Tricadia

Arif Inayatullah/

Michael Barnes

2015 $4B

Kingdon

Mark Kingdon

2007 $7B

Litespeed

Jamie Zimmerman

2014 $3.4B

$2B

$1.6B

$1.2B

$303M

Closed hedge

funds in 2019

$2.5B

*includes assets in Raptor Global Fund
Source: Bloomberg

Outflows Pick Up

Money is leaving the industry. So far this year, clients pulled a net $11.1 billion from hedge funds, more than erasing last years inflows.

$200B

100

0

-100

-200

1990

2018

$200B

100

0

-100

-200

1990

1994

1998

2002

2006

2010

2014

2018

$200B

100

0

-100

-200

1990

1994

1998

2002

2006

2010

2014

2018

Source: HFR

Startups Plummet

With inflows stagnant, the number of new firms has plummeted.

600

500

400

300

200

100

0

2000

2018

600

500

400

300

200

100

0

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

600

500

400

300

200

100

0

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

Source: Preqin

Hedge Funds Trounced Markets Over the Long Term

Going back to the 1990s, hedge funds were a standout investment. In the early days, competition was slim and many hedge fund managers were able to post double digit annualized returns.

S&P 500 Index

HFRI Fund Weighted

Composite Index

Bloomberg Barclays US

Aggregate Bond Index

1,000%

800

600

400

200

0

1990

2008

S&P 500 Index

HFRI Fund Weighted Composite Index

Bloomberg Barclays US Aggregate Bond Index

1,000%

800

600

400

200

0

1990

1993

1996

1999

2002

2005

2008

S&P 500 Index

HFRI Fund Weighted Composite Index

1,000%

Bloomberg Barclays US Aggregate Bond Index

800

600

400

200

0

1990

1993

1996

1999

2002

2005

2008

Source: Bloomberg

Short Term, Not So Much

Since the financial crisis, historically low interest rates and the rise of quantitative and passive investing have made it hard for many managers to make money. While hedge funds, on average, have outpaced bonds, they’ve massively underperformed stocks.

S&P 500 Index

HFRI Fund Weighted

Composite Index

Bloomberg Barclays US

Aggregate Bond Index

300%

250

200

150

100

50

0

–50

2009

2018

S&P 500 Index

HFRI Fund Weighted Composite Index

Bloomberg Barclays US Aggregate Bond Index

300%

250

200

150

100

50

0

–50

2009

2012

2015

2018

S&P 500 Index

HFRI Fund Weighted Composite Index

300%

Bloomberg Barclays US Aggregate Bond Index

250

200

150

100

50

0

–50

2009

2012

2015

2018

Source: Bloomberg

A Few Bright Spots

While many pension funds and other institutions have given up on hedge funds after years of disappointing results, a core group of investors continue to shovel money to a few managers with the best performance. Macro fund Element Capital Management, run by Jeff Talpins, has seen assets rocket 178% from the beginning of 2014 to the beginning of 2018 (and he’s raised another $3 billion since). Two Sigma and Renaissance Technologies both saw assets more than double as investors flocked to algorithmic traders.

2014

2015

2016

2017

2018

Element

Elliott

Millennium

Two Sigma

Man Group

RenTech

0

10

20

30

40

50

$60B

2014

2015

2016

2017

2018

$60B

50

40

30

20

10

0

Element

Elliott

Millennium

Two Sigma

Man Group

RenTech

2014

2015

2016

2017

2018

$60B

50

40

30

20

10

0

Element

Elliott

Millennium

Two Sigma

Man Group

RenTech

Note: Assets under management as of Jan. 1 each year
Source: Bloomberg

Two new funds were able to buck the trend and attract billions because the founders previously held senior roles at top-performing firms. Michael Gelband started ExodusPoint with a record $8 billion after leaving Millennium Management. Dan Sundheim opened his D1 Capital Partners with $4 billion, after managing almost half the assets at his old firm Viking Global Investors.

Fees Shrink

As institutions flocked to funds and handed out bigger slugs of cash, they’ve pushed for lower fees.

Management fee

1.60%

1.55

1.50

1.45

1.40

2008

2018

Incentive fee

20%

19

18

17

2008

2018

Management fee

Incentive fee

1.60%

20%

1.55

19

1.50

18

1.45

1.40

17

2008

2018

2008

2018

Management fee

Incentive fee

1.60%

20%

1.55

19

1.50

18

1.45

1.40

17

2008

2010

2012

2014

2016

2018

2008

2010

2012

2014

2016

2018

Source: HFR

Looking Ahead

As for the future of the hedge fund industry, a lot depends on the markets, said Rob Christian, head of research at K2 Advisors, which invests $11.6 billion in hedge funds. Low interest rates globally have sent stocks higher over much of the last decade, causing institutional investors to flee these private partnerships in favor of low-cost index funds and ETFs.

Once rates start rising “we would expect volatility to increase and active management to be rewarded with increased inflows,” he said. “It’s just hard to predict when it will happen.”