Hedge funds: The new reality

Date: Tuesday, June 11, 2013
Author: FierceFinance

The hedge fund industry has been eating humble pie for the better part of the last 10 years. Funds in aggregate have underperformed the stock market over that period. If you look at just the period that coincides with the financial crisis, the average hedge fund fared well, posting much smaller losses than the main stock indexes. Of course, that's how it's supposed to be. And performance over that period doesn't count for much now.

The reality is that hedge funds have lowered their expectations and are trying hard to goad potential limited partners to do so as well. Many in fact welcome a discussion about everything but performance.

The silver lining is that the industry today is healthier. High-quality global journalism requires investment.

"There are far fewer marginal hedge funds out there because we have gone through a period of really culling the herd," one expert told the Financial Times. "A lot of the people who didn't know what they were doing have been put out of business or folded up shop."  

It does seem like more funds are interested in mere survival, more so than swinging for the fence. And that may be a good thing, especially for the institutions that aren't necessarily demanding SAC Capital-like returns. They would rather have steady performers, year after year.

Many funds nowadays deem that audience vastly preferable to wealthy families who still seem to want massive, market-crushing gains. In this corner of the market, skepticism of the hedge fund industry as a whole seems to be gaining.

"The result is a calmer, if less lucrative life, both for hedge fund managers and their investors," according to the FT.

While the industry may be more staid than a generation ago, it's just as competitive. The lion's share of new inflows goes to just five percent of all hedge funds. For the remainder, the fight for scraps is bitter indeed. In the end, performance does matter. And if you have a good performance story to tell, in addition to all the non-performance stories that you have to tell to attract inflows, you might find yourself in good shape.