Have hedge fund managers, once the kings of the roost among the 1 percenters, finally seen their day?
Bobbie Axelrod’s house in South Hampton in the TV series “Billions”
By Rob Copeland and Timothy W. Martin for the New York Times
Some of the most famous minds in investing convened in Las Vegas this week for an annual celebration of the hedge-fund industry. But, feeling the weight of years of underperformance and an uptick in client defections, the mood was anything but festive.
Longtime hedge-fund manager Leon Cooperman openly questioned whether it made sense to continue on after redemptions from his firm, Omega Advisors.
Major hedge-fund clients, including China’s sovereign-wealth fund, aired doubts, positing that 90% of hedge-fund managers probably weren’t skilled enough to navigate the markets.
And it had been hard enough to get some of the attendees to even show up. The slump in the industry—highlighted by the largest exodus of investors since the financial crisis—damped interest in the SkyBridge Alternatives Conference, commonly known as SALT, according to Anthony Scaramucci, the event’s organizer and founder of SkyBridge Capital, which puts $13 billion into hedge funds.
“There is a decided pessimism in the hedge-fund community,” he said, while predicting the industry would survive. “A lot of guys opted out of coming, frankly, because of performance issues.”
A SkyBridge spokeswoman later said 2,100 people registered for the conference, up from 1,800 the year before.
The mood was a far cry from previous years. The annual desert confab, a three-day event held at the Bellagio hotel, is a staple of the hedge-fund circuit, famous for attracting heavyweight investors, celebrities and politicians. This year’s roster of speakers included everyone from Caitlyn Jenner, the transgender-rights advocate, to former New York City Mayor Michael Bloomberg. The days are dominated by panels of investment ideas, while after-hours events include swanky suite parties and a performance by the rock group the Killers.
But this year hedge funds arrived with unprecedented questions about their worth from their investors, and even some of the managers themselves. That is largely because since the start of the bull-market run in early 2009, a more traditional mix of stocks and bonds bested a broad hedge-fund index in 22 of 28 quarters, according to a Wall Street Journal analysis of data from research firms HFR Inc. and Morningstar Inc.
Collectively, clients yanked $15 billion during the first quarter, marking the largest quarterly outflow in six years, according to research firm HFR. The outflows represented the first consecutive quarters of outflows since 2009.
Big investors unwinding hedge-fund bets are piling money into other nontraditional assets such as private equity, real estate, toll roads and bridges. Others are migrating to cheaper alternatives that mimic the strategies of hedge funds but at significantly lower cost.
“I’m sort of disappointed with the performance, to say the least, of the industry,” Roslyn Zhang, managing director overseeing hedge funds for China Investment Corp., said Wednesday at SALT. China Investment is the country’s sovereign-wealth fund and the world’s second-largest investor in hedge funds, with nearly $30 billion committed to the asset class, according to Preqin, which tracks investment data.
Ms. Zhang later told The Wall Street Journal in an interview that she was excising managers from her approved list and evaluating whether to slash the fund’s investment in hedge funds overall.
The 73-year-old Mr. Cooperman summed up the industry’s mood with comments he made Wednesday. “The hedge-fund model is under challenge. It’s under assault,” he said, adding that he was contemplating whether it was worth it to remain running hedge funds at all. Mr. Cooperman’s Omega Advisors told investors in March that U.S. regulators intend to recommend civil charges against the firm for alleged violations of securities law. Mr. Cooperman has denied any wrongdoing and said he would defend himself and the firm.
Hedge funds typically charge higher fees than other money managers, usually 2% of assets under management and 20% of profits. But one prominent manager, James Chanos, said Thursday “fees are too high. I’m surprised they’ve stayed this high for this long.”
Since the crisis, hedge-fund managers have rejected direct comparisons with the broader market returns, saying they aim to reduce volatility and invest elsewhere than simply stocks and bonds. “But guess what happened when a flat market showed up?” Mr. Chanos added. “Everybody got killed. That’s the real problem.”
China’s sovereign-wealth fund isn’t the only big investor having second thoughts. In recent weeks, insurers MetLife Inc. and American International Group Inc. said they were pulling billions out of hedge-fund bets, citing poor performance. Large retirement plans from New York to Illinois to Oklahoma are also stepping back.
Insurer CNA Financial, a subsidiary of Loews Corp., has exited from about $500 million in hedge-fund investments since 2014. “The returns haven’t been there,” said Loews Chief Executive James Tisch, on a recent earnings call.
Two decades ago when the industry was smaller, “hedge funds could earn very, very attractive returns,” Mr. Tisch said. “Now that there are hundreds of them, the rate of return that those hedge funds can earn has come down rather dramatically.”
The investor rebukes are starting to inflict pain on some brand names. Assets fell about $1 billion in March for Och-Ziff Capital Management Group LLC, according to a company filing. The largest publicly traded U.S. hedge-fund manager had $42 billion as of April 1.
“There is no doubt that we are in the first innings of a washout in hedge funds,” said Dan Loeb of Third Point LLC in a quarterly letter dated April 26. Money was recently pulled out of Third Point, said people familiar with the matter, which the firm hopes to replace with new funds.
Another manager, Paul Brewer of Rubicon Fund Management LLP, told SALT attendees Wednesday, “The hedge-fund industry needs to rethink the model.” Managing tens of billions to bet on macroeconomic trends at a single firm “and trying to have decent returns is not possible.”
At SALT, the relative strain on the industry was evident beyond the official events.
One major investment bank told clients they would have to hail cabs to a nightclub venue because the bank would no longer cover limousine service of years past, a person familiar with the matter said.
Tips at the shoe-shining station a few feet from the main ballroom were down more than 50%, to $5 or under in most instances, from as much as $20 one year earlier, a shoe shine employee said.