The golden era of hedge funds is over

The wealth creation and compensation is gone. So is the mystique.

January 4, 2017

This past year marked the beginning of the end for hedge funds as we’ve known them. The compensation and wealth creation they offered a decade ago has changed dramatically. The mystique is gone.

And considering Tom Wolfe famously called hedge funders the new “Masters of the Universe” just 8 years ago, it’s safe to say few people saw this happening so soon.

What happened?

In short, investors grew tired of fund managers growing rich while producing little to no returns.

In fact, one source claims that chief investment officers are so fed up they’d rather work with a trader who charges no fees over one who does, even if they know the latter will make more money.

The evidence of this is hard to ignore, particularly when it comes to larger clients like MetLife, which pulled their money from hedge funds last year.

For a bit more detail…

The typical hedge fund pricing model is called “2 and 20,” meaning managers get 20% of profits and charge a 2% management fee (which they receive whether they make money or not).

So, when fund managers struggled to generate satisfying returns (which was the case post-financial crisis), investors said, “Hey, you’re vacationing in the Hamptons, while I’m over here looking at minimal returns. What am I paying you for again?”

There’s still hope for hedge funds, though. Some folks predicting that — like most things in life — the pendulum will swing and “funds facing redemptions today will be back in demand tomorrow.”

Daily briefings, straight to your inbox

Business and tech news in 5 minutes or less

Join over 1 million people who read The Hustle


How'd Bezos build a billion dollar empire?

In 1994, Jeff Bezos discovered a shocking stat: Internet usage grew 2,300% per year.

Data shows where markets are headed.

And that’s why we built Trends — to show you up-and-coming market opportunities about to explode. Interested?

Join us, it's free.

Look, you came to this site because you saw something cool. But here’s the deal. This site is actually a daily email that covers the important news in business, tech, and culture.

So, if you like what you’re reading, give the email a try.