https://www.bloomberg.com/graphics/2018-shrinking-hedge-fund/
By Katherine Burton, Melissa Karsh and Sam Dodge
Published: September 11, 2018 | Updated: November 30, 2018
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.
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.
Startups Plummet
With inflows stagnant, the number of new firms has plummeted.
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.
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.
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.
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.
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.”
Correction: Corrects peak assets for Kingdon Capital Management.
Edited by Margaret Collins
With assistance from Nishant Kumar, Suzy Waite, Katia Porzecanski and Saijel Kishan
By Katherine Burton, Melissa Karsh and Sam Dodge
Published: September 11, 2018 | Updated: November 30, 2018
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.
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.
Startups Plummet
With inflows stagnant, the number of new firms has plummeted.
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.
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.
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.
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.
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.”
Correction: Corrects peak assets for Kingdon Capital Management.
Edited by Margaret Collins
With assistance from Nishant Kumar, Suzy Waite, Katia Porzecanski and Saijel Kishan
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