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Investors blame industry size for hedge fund underperformance

Not the excessive fees they charge, but the rapid AuM-growth of hedge funds after the financial crisis is to blame for their disappointing performance. Unfavourable macro conditions also play their part.


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Those are the conclusions of a study conducted by Barclays among global hedge fund investors, almost three quarters of whom are based in the US. One in five respondents were from Europe.

Until 2011, the hedge fund industry outperformed conventional funds, accumulating a maximum cumulative alpha of 139%, according to the study. However, since then hedge funds have been underperforming other, cheaper funds, despite charging significantly higher fees. While the high fees are an often-cited reason for investors to stay clear of hedge funds, those who are already invested do not see the high fees as a reason for underperformance.

Crowding out

Rather, the main culprit is considered to be overcrowding of assets in particular strategies, and many hedge funds growing too big. This is supported by the stats, which show assets under management in the hedge fund industry have grown almost twice as fast as the total number of funds available to investors, since 2009. Considering a lot of the well-performing hedge funds are also soft- or hard-closed, it suggests many of the remaining funds have grown at rapid pace in recent years, which has come with a cost: since July 2015, asset-weighted indices have significantly underperformed fund-weighted indices, by up to 6% (for event-driven strategies).

Macro conditions are also a common scapegoat. Investors believe hedge fund managers have had difficulty generating alpha because markets have been increasingly led by macroeconomic factors such as central bank policies. This has resulted in higher correlation and lower dispersion between stocks, making it harder to generate alpha.   

This tendency of blaming factors outside hedge fund managers’ control for their dismal performance results in just 19% of interviewees planning to reduce their allocation to hedge funds this year, even though 61% of those polled said they have been disappointed with the performance of their hedge fund portfolio over the last couple of years. Some 46% of those polled intend to reallocate some money to different managers however.