The Incredible Shrinking Hedge Fund

By Katherine Burton, Melissa Karsh and Sam Dodge

Published: September 11, 2018 | Updated: February 4, 2019

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.

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.

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.

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

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.

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.

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.

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

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.”

The Incredible Shrinking Hedge Fund

Melting Ice Cubes

Outflows Pick Up

Startups Plummet

Hedge Funds Trounced Markets Over the Long Term

Short Term, Not So Much

A Few Bright Spots

Fees Shrink

Looking Ahead