- Hedge-fund performance slumped while fees were cut in 2018.
- Industry insiders say equity managers, the battle for tech talent, and fee pressure are all coming up daily at hedge funds big and small.
- “It’s not a great time to be in the hedge-fund business, relative to other times,” said Adam Zoia, CEO of the consulting firm CompIQ.
Headlines about high-profile hedge-fund closures and performance troubles commanded the industry’s attention in 2018. A year that started with promise for both established managers and new players quickly tanked after the second quarter’s close.
Fees are pushed lower with every new fund launch, and large managers like Dmitry Balyasny’s firm laid off large swaths of staff. On top of all the industry pressures, the markets in the fourth quarter lobbed off any kind of returns many managers had managed to squeeze out so far this year — through the end of November, hedge funds had lost 2% on average, according to Hedge Fund Research.
Going into 2019, industry observers and participants believe these trends will dominate the conversation:
Equity funds will be put to the test
It’s time for long-short funds to prove their worth. After nearly a decade of a tranquil, post-crisis bull market, when equity hedge funds on average finished in the black but rarely beat the S&P, market volatility in 2018 has given investors reason to turn to active management again. Now these equity hedge funds have to prove to clients they’re able to crank out positive returns with the markets in constant spasms.
“More and more people believe the large-cap developed index is highly efficient, and it’s very hard to deliver any excess returns,” said Don Steinbrugge, CEO of the hedge-fund consultancy Agecroft Partners. “You consistently have to be doing more.”
Long-short strategies still hold the highest proportion of assets of any hedge-fund strategy in the industry, according to Troy Gayeski, a senior portfolio manager at the fund-of-funds manager SkyBridge Capital, with 40% to 50% of industry assets under management. The hedge-fund industry’s asset total — more than $3.2 trillion — was partially inflated by this equity exposure during the market’s long bull run.
If long-short players can’t keep the returns up during bouts of volatility, then industrywide assets will start to slip because of poor performance and investor outflows.
With a lower benchmark to beat, equity hedge funds would be under the microscope in 2019.
‘2 and 20’ will continue to fade away
The 2% management fee and 20% performance fee structure typical of the hedge-fund industry’s early days has been slipping away for years. Hedge Fund Research reported that only 30% of the industry had fees at or greater than the traditional “2 and 20” rate. The average management fee has fallen to 1.43% industrywide, and incentive fees sat at 16.93% as of the end of the third quarter, according to the data provider.