Every now and again, an article or piece of research crosses my desk that is so wrong-headed, it demands a riposte.
Today’s deserving article is in the WSJ based on a survey from Citi: Hedges’ Assets: $5 Trillion; with the sub hed Funds May Triple Over Five Years, Survey Says; New Offerings to Stoke Growth:
“The hedge-fund industry may more than double in size during the next five years, to more than $5 trillion in assets, as private fund firms broaden their offerings to compete with traditional money managers, according to a recent Citigroup survey.
The poll of investors, consultants and money managers predicted that hedge funds could lure $2 trillion in new money to investment vehicles long associated with mutual-fund companies and other institutional managers, including “long-only” funds that buy and hold stocks.”
I highly doubt the industry is doubling in size, or that assets will triple. There are a broad variety of reasons:
1. Withdrawals from hedge funds have quickened.
2. Performance over the past decade has been poor, with high correlations and reduced Alpha; WSJ reports that YTD Hedge funds are lackluster performance, following three years lagging behind the overall market—
3. The Hedge fund industry is experiencing a period of consolidation and even contraction
4. Funds of funds are closing rapidly. Over the past month, I have learned of several substantial FoFs that are closing their doors. Some of this is due to Madoff feeder fund issues; others problems are performance, and multi-layered fees.
5. High Fees are causing resistance to stiffen for several key attributes of Hedge Funds: 2& 20% fee structure, extended lock up periods, limited transparency, windows for withdrawals.
Anecdotes are not data, but I cannot help but pass along what I have heard from hedgie friends and colleagues over the past year:
I know of numerous funds under pressure from investors — “I’ll give you one more quarter, but that’s it.” Several well known Fund of Funds are either closing down or radically making over their models.This is beyond the usual swath of Funds that are so far below their high water mark each year that they dissolve and reform to circumvent that. Some people estimate that as many as 25% of all hedge funds will go away each year (to be replaced or not).
Raising assets has become increasingly challenging. The ongoing failure of highly pedigreed ex-Goldman traders leaving the nest to launch funds that barely last a year has been regular fodder for the financial pages.
And perhaps most surprising, a number of longstanding funds with successful track records are downsizing or even returning capital to investors and closing down.
There is no doubt that a small number of hedge funds will be very successful. Some of the biggest names continue to demonstrate out-performance, attract new assets, bring in new institutional investors. These are the exceptions, not the typical funds.
It is not a particularly great time to be a fund manager. The days of easy money are over. Attracting clients, raising AUM, generating Alpha have all become increasingly difficult.
The golden age of hedge funds may already be over . . .
Hedges’ Assets: $5 Trillion
WSJ, June 11, 2012
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