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.”

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