A common complaint: There are too many hedge funds. If so, that is in the process of being corrected. For the fifth straight year, the $3.2 trillion industry suffered more fund closings than launches, according to Hedge Fund Research.
During the past five years, more 4,000 hedge funds have been shuttered, leaving the count at less than 9,000 by most estimates. Big stars like Jeff Vinik and Louis Bacon closed their funds, to the shock of the entire industry.
Vinik, the former Fidelity Magellan chief, is returning money to investors. His funds were up a little over 4%. Vinik told clients it was more difficult nowadays to raise money. Veteran hedge operator Bacon—he’s been at this for more than three decades—logged a performance, he said is a letter to clients “in the low single digits.”
Indeed, the earlier enthusiasm for starting hedge funds seems to be waning. The number of launches last year was the second smallest this century.
The smallest was 328 in 2000, a recession year and one where the dot-com bubble burst. That is 60 below 2019’s tally. One glimmer of good news was that in November, the trend reversed, at least for the moment, with a net of $4.5 billion coming into the industry.
At the same time, investors pulled $81.5 billion out of these vehicles in 2019 through November, eVestment data show. A big reason is that the funds, on average, have failed to keep pace with the S&P 500 in a roaring bull market, the Bloomberg Global Hedge Fund Index indicates. The funds had a strong first half but sputtered in the second half. They ended up gaining around 7.8% last year, less than one-third the broad-market index’s performance.
Hedge fund defenders say that these investing pools aren’t meant to best the stock market, but rather to be a buffer for when stocks tumble. More significantly, the industry’s advocates argue, is that the one-time clamber to get into a hot area has brought in a lot of marginal players who drag the average return down.
Assuming hedge funds’ inventory drops to a sustainable level, with the weaker names gone, the category may well look better as a whole. Certainly, some funds deliver eye-popping results, such as the four-year-old Singapore-based Vonda Global Fund, which almost quadrupled in value in 2019. It did so by diving into the combustible world of exchanged-traded futures, covering everything from commodities to government bonds to equities. It helped that those asset classes had positive returns for the year.
The fees structure of hedge funds definitely gives an advantage to their managers’ incomes, with 2% in annual management levies and 20% of any profits (many funds, desperate for investors, charge 1% and 10%). Plus, this is an investment segment that is endlessly inventive. For instance, hedge funds dedicated to cryptocurrency are springing up, with more than 200 in operation today, 10 times the number from five years ago.