Hedge Fund Comeuppance: Firms Hunker Down, Start to Cut Fees as Investors Wise Up and Withdraw Money

Some Masters of the Universe are having their wings clipped. Hedge fund have continued to charge rich fees even as their results not only became more correlated with stocks but have undershot them. In other words, they’ve repeatedly failed to deliver on their raison e-etre: superior results, or failing that, useful diversification.

Investors, who’ve historically been dazzled by the promise of hedge fund alchemy, are finally realizing that what they have bought is dross and have finally decided enough is enough. In late 2014, CalPERS stunned the investor community by saying it was exiting hedge funds. Last month, the New York City pension system said it was terminating its $1.7 billion program. The Illinois State Board of Investments decided to cut its hedge fund commitments by $1 billion in 2016, while AIG said it will trim its $11 billion allocation by 50%. The New York Post reported that the $3.2 trillion industry could see as much as $500 billion in withdrawals this year.

These gloomy forecasts come on the heels of the marquee annual hedge fund conference, the SkyBridge Alternatives at the Bellagio in Vegas. But even a bad year does not look all that bad from Hedgistan. From Institutional Investor:

… industry titans rubbed shoulders with business legends like T. Boone Pickens, political heavyweights such as John Boehner and Hollywood celebrities including Will Smith and Ron Howard. But despite the A-list delegates and luxe environs — some 2,000 conference guests enjoyed lavish pool parties, VIP dinners, private concerts with the Killers and the Wailers, a pop-up salon and free spin classes — the mood this year was almost somber. And it’s easy to see why: After years of mediocre aggregate performance, followed by a terrible first quarter, hedge fund managers are enduring withering criticism from investors. And some of these investors are voting with their feet.

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