Hedge Fund Feast or Famine?

This has turned out to be a year of milestones for the hedge-fund industry. It is a tale we have chronicled all year. As markets barrel into the end of the fourth quarter, it’s worth reviewing the highlights from this year to see if we can deduce what might be in store for the 2&20 crowd in 2015.

The good news — at least for the fund managers — is that hedge funds continue to attract assets. The latest read is $2.82 trillion under management spread among almost 10,000 funds, according to HFR Hedge Fund Industry Reports.

The bad news? “Hedge funds are shutting at a rate not seen since the financial crisis,” according to a report earlier this month from Bloomberg News. The prime culprit is underperformance. Data compiled by Bloomberg show that as of Dec. 1, across all hedge funds, returns have been a mere 2 percent. It is the worst performance for the industry since 2011.

Part of the problem is in the skewed distribution of returns. Rather than the normal Gaussian distribution typically observed in smooth bell curves, it is feast or famine. A handful of top–performers are capturing the lion’s share of alpha, or market-beating returns, leaving the rest of the industry with scraps.

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