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Finance & economics
Hedge funds
Back in the game
NEW YORK
Once the kings of capital markets, hedge funds have become a sideshow. Now
many hedgies hope the slump will make them relevant again
edge funds have had a rotten decade.
HStar managers were once perceived to
be infallible “masters of the universe” who
made money for wealthy individuals and
big institutional investors in both good
times and bad. But steep losses during the
global financial crisis of 2007-09 tarnished
that reputation, and subsequent returns
have failed to resurrect past success. The
result has been a humbling comedown.
Many of the hedge-fund industry’s biggest
names—like Leon Cooperman, who ran
Omega Advisors, and Eric Mindich, once
the youngest-ever partner at Goldman
Sachs—have thrown in the towel, returned
investors’ capital and converted their
hedge funds into family offices.
These woes have been exacerbated by
seismic shifts in the allocation of capital.
As hedge-fund profits wilted, institutional
investors—such as pension funds and uni-
versity endowments, which make up the
bulk of hedge funds’ clientele—saw little
reason to pay meaty fees for mediocre per-
formance. Investors turned to cheap index
funds instead, or sought out the juicier re-
The Economist April 25th 2020 65
Also in this section
66 Risk parity unravels
67 Oil: less than zero
67 China’s anti-bitcoin
68 Buttonwood: The euro’s durability
69 Free exchange: Does moral hazard
matter?
banks, estimates that almost half of the
roughly $30trn invested in American equi-
ties is now passively managed.
Hedge-fund managers have long
warned that these trends in investment all-
ocation might pan out poorly for investors
in a crisis. The financial-market chaos
wrought by the pandemic has tested that
claim, and hedge funds have been vindicat-
ed, though only partially. They have not
turns dangled by private-equity and prop- made big gains. And they have experienced
erty funds. Having managed more capital outflows: figures released by Hedge Fund
than their private-equity peers for much of Research on April 22nd suggest that these
the past decade, by 2019 the hedge-fund in- amounted to 1% of assets under manage-
dustry was a fifth smaller than private equ- ment in the first quarter. Still, they have, so
ity (see chart 1). Index funds, or “passive” far, lost less than the market. And there are
investors, have eclipsed both. The Bank for early signs that the crisis could benefit the
International Settlements, a club of central industry in the longer term, if it causes in-
vestors to appreciate the benefits of hedg-
ing their equity exposure, and to shift away
Dethroned 1 from illiquid assets.
Assets under management, $trn How you think hedge funds have per-
4 formed during the market turmoil depends
on how stern a test you apply. If you think
their purpose is to make steady returns, re-
3 gardless of how markets fare, then most
Hedge funds have failed. On average, the value of their
2 portfolios has fallen by 10.5% (see chart 2
on next page). But they have at least beaten
Private equity the market: the s&p 500 fell by 20% in the
1 first three months of the year. True, average
annualised returns of the s&p 500 in the
0 past five years, at 4.6%, still beat those of
2009 11 13 15 17 19 the average hedge fund, at 3%. But the goal
for most institutional investors is not to
Sources: Hedge Fund Research; Preqin
achieve the juiciest returns; it is to generate 1