Is Hedge Funds' Midas Touch Waning?

Is the midas touch of hedge funds are waning? Yes, says a Reuters report warning "there are several signs" that the $2.9 trillion industry may be on the decline. http://www.reuters.com/article/us-hedgefunds-outlook-idUSKCN0Y01LH Hedge funds, who were demanding hefty fees, are now facing "unsatisfied clients" who either ask for steep discounts in fees or withdraw their money entirely. According to the report, David Einhorn's Greenlight Capital lost 20 percent last year and the chief investment officer for the California State Teachers Retirement System called the typical hedge fund fee model "broken." The report highlighted that Daniel Loeb, who runs $17.5 billion Third Point, said in a recent letter to investors "as most investors have been caught offsides at some or multiple points over the past eight months, the impulse to do little is understandable." As a result, the report noted that hedge funds are under pressure to cut down their fees, which charges 2 percent of assets invested plus 20 percent of gains, or face investors withdrawing capital in favor of other illiquid investments ranging from private equity to real estate. Total global hedge fund capital declined to $2.86 trillion in the first quarter, including investor outflows of $15.1 billion marking not only the largest quarterly outflow since the second quarter of 2009, but also the first consecutive quarters of outflows since 2009, according to a press release from Hedge Fund Research. https://www.hedgefundresearch.com/sites/default/files/articles/PR_20160420.pdf However, the HFRI Fund Weighted Composite Index gained +1.0 percent in April, fully recovering the first quarter decline and lifting 2016 performance to +0.3 percent. The HFRI Asset Weighted Composite Index added +0.2 percent for the month. "Despite this recovery, downside risks associated with the Brexit vote, US elections, surging Japanese Yen and negative swap spreads still remain as potential catalysts for volatility in coming months," Kenneth Heinz, President of HFR, said in a statement. https://www.hedgefundresearch.com/sites/default/files/articles/HFRI%204_2016.pdf