Hedge Funds Continuing to Take It on the Chin

We’ve remarked from time to time this year that a lot of hedge funds aren’t having a particularly good time these days. The volatility that has punished mere mortals has also taken a toll on many Masters of the Universe.

The Wall Street gives an update, showing that even some of the biggest names have been bloodied. The most interesting development is that investors are starting to negotiate fees, a development observers and participants swore would never happen.

I also recall in the 1980s, when all credit cards had an annual fee and charged the legal maximum on balances (I believe 19.8%; banks could and did shop jurisdiction), experts insisted they’d never, NEVER cut prices either.

From the Wall Street Journal:

Some of the biggest hedge funds are having their worst years, and the flood of new money going into funds has slowed. That is pressuring an industry bracing for investor withdrawals and worrying about how to survive without lucrative performance fees.

Some investors willing to put new money in funds are even beginning to ask about better terms, a contrast to the situation just last year, when investors needed to beg to get into hot funds.

Big funds run by star investors, such as Steve Mandel’s Lone Pine Capital, Dinakar Singh’s TPG-Axon Capital Management, Tim Barakett’s Atticus Capital and Tom Steyer’s Farralon Capital, have lost between 7% and 25% so far this year, investors say. Ken Griffin’s biggest fund at Citadel Investments is down 6% this year, its worst performance in 14 years.

Overall, hedge funds — private partnerships that invest money for wealthy investors and institutions — are having their worst year since at least 1990, the year that Hedge Fund Research Inc. began tracking the data. The average fund lost 3.43% this year through July, faring better than the decline of 12.65% in the Standard & Poor’s 500 but below the gain of 1.05% in the Lehman Brothers bond index. August data haven’t been calculated yet.

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  1. Peripheral Visionary

    One fundamental problem is that, with the market sideways and investors sitting tight or even pulling out, the hedge funds are now reduced to betting against each other. The market can be a positive-sum game with new money entering either from investors or from dividends, or from private buyouts, but with none of that happening, it is now a zero-sum game, and for every winner there will be a loser. All the arguments for the outsized fees are starting to look ring hollow now that returns are either converging or, worse, simply becoming random.

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