Speaking at the World Economic Forum in Davos earlier this
year, George Soros seemed to be sounding the death knell for
the industry he has dominated for so long.
Since hedge funds are now a dominant force in the market,
they cant, as a group, outperform the market, he
said. Outperforming the market with low volatility on a
consistent basis is an impossibility. I outperformed the market
for 30-odd years, but not with low volatility.
The numbers certainly seem to back him up. Recent research
by BarclayHedge and TrimTabs Investment Research shows that the
hedge fund industry as a whole underperformed in January,
up only 2.5% compared with the S&P 500s 5%. This
follows a dismal year for the industry in 2012 when the S&P
500 was up 14% on the year while hedge funds managed just
Despite this performance, however, the research based
on data from 3,459 funds shows that the hedge fund
industry took in $4.3 billion in January, compared with
outflows of $20.7 billion in December.
Sol Waksman, founder and president of BarclayHedge puts this
down to the macro risk environment. Although assets did
flow out of hedge funds and equity mutual funds last year,
assets are flowing back now because theres less fear that
a major tail-risk event will destabilize western
economies, he says.
It seems perverse that investors are keeping faith with the
asset class given the growing criticism even from among
its own ranks that its 2% and 20% fee structure is
indefensible given performance.
Hedge funds are simply writing puts on the S&P
500, sniffs one London-based banker. "This
masquerades as alpha until the market crashes, then it
looks like beta."
There is growing disquiet even from within the ranks over
hedge fund fees. Cliff Asness, co-founder of asset manager
AQR Capital Management, has recently been vocal on the topic,
stating that while hedge funds generally run portfolios
comprising a mix of beta and alpha, they set their fees on the
basis it is all alpha.
Speaking at the
University of Oxfords Saïd Business School in March,
Oaktree Capital co-founder Howard Marks supported this
Only exceptional people should get exceptional
compensation, he declared. There are 40,000 people
in 8,000 hedge funds making decisions and getting 20% of
profits. Are there really 40,000 extraordinary people out
Given that the industry underperformed most other asset
classes last year, the answer is probably no. There needs
to be a shakeout, Marks said. Strangely, many of their
investors dont seem to agree.