Hedge Funds

They were the new Masters of the Universe. Hedge-fund managers pushed aside the old-money bankers by making outsized investments and reaping lavish compensation. They got their name from the practice of hedging, by betting on falling as well as rising prices, something most money managers couldn’t do. These larger-than-life characters splashed fortunes on ritzy homes, artwork and political campaigns and even spawned a TV series. While some made a killing with well-timed bets, they all raked in fat fees as more savers signed up for the mystique of these “alternative” investments. Then it all went wrong. As the field grew more crowded, many funds struggled to make money, just as near-zero interest rates helped send global stocks on a tear. Investors began to revolt. Now the $3 trillion hedge-fund industry is demonized by critics — ranging from legendary investor Warren Buffett to college students — who claim their hefty fees are a ripoff.

Investors are bailing out of hedge funds or leaning on them to reduce fees. Since the start of 2016, they have pulled out a net $71.4 billion, including $11.1 billion in the first three quarters of 2018. Pension funds in U.S. states including Illinois, New York, Kentucky and Rhode Island have eliminated or reduced their holdings. They followed the biggest one, the California fund known as Calpers, which began to divest in 2014 after concluding hedge funds were too expensive and complex. University endowments, foundations and insurers jumped on the bandwagon, causing more hedge funds to close up shop. Veteran manager Richard Perry, whose fund returned an average of 15 percent a year for decades, threw in the towel, saying his style of investing no longer worked. Jon Jacobson, a former Harvard Management Co. star, closed his 20-year-old Highfields Capital Management after struggling in recent years in a “very treacherous investment environment.” Over the last decade, hedge funds, on average, produced roughly a third of the annual returns on stocks, though they did outpace a broad index of bonds. Some blamed middling performance on low interest rates, computer-driven markets, government regulation or a shift to so-called passive investing. Others got snared in insider-trading scandals. The election of U.S. President Donald Trump lifted returns in the months after he took office and put former hedge-fund managers, including Treasury Secretary Steven Mnuchin, in powerful roles.