Hedge-Fund Assets Slumped 48% Last Year on Losses, Withdrawals

By Saijel Kishan
Jan. 14 (Bloomberg) -- Hedge-fund assets fell 48 percent in
2008 because of investment losses and client defections, lowering
fees earned by most managers, according to TrimTabs Investment
Research and BarclayHedge.
Assets slumped to $998.4 billion at the end of December from
$1.92 trillion a year earlier and were at their lowest level
since July 2004, when they stood at $976.7 billion, the firms
said in a statement today. Hedge-fund investors withdrew a record
$148.8 billion in December.
“Approximately two-thirds of industry revenue comes from
performance fees and we estimate that 81 percent of hedge funds
were under water last year,” Charles Biderman, chief executive
officer of Sausalito, California-based TrimTabs said in the
statement.
Hedge funds lost 18.3 percent last year, according to Hedge
Fund Research Inc., the most since the Chicago-based firm began
tracking data in 1990.

And for those 81% that are underwater, they likely won't make any money in 2009 either (until they get back their high water mark). Don't think you'll see many buyers emerge from this group anytime soon.

holy mother of god...

I can't tell you how many recent grads I saw go into the business. WOW, are those kid going to be moving back in with mom and dad now.

Those are ugly numbers. I still think when the dust settles a bit more we will see a number of firms keep their clients and have them agree to reset their marks. Many of the others will close, of course, but I can also see opportunities for new funds to open.

Please don't think I am brushing this news off...it's ugly and painful. There has definitely been a steep decline in the number of people that I speak to that want to go into hedge funds...go figure.

NYC - yes, they are going to have to make some big changes, but they can handle the move home for a bit. It will bring them back to earth, and frankly some of them needed to be humbled.

".....and have them agree to reset their marks"

there is no chance of this happening. It is laughable to even suggest that any investor would feel so kindly towards their hedge fund mgr that just lost them a ton of dough to reset their marks so as to aid in the hedge fund managers financial recovery....it is quite the opposite at good funds, they feel awful that they lost clients money (and their own) and if they can stay in biz will do what ever they can to get above their fund above highwater mark and start making both themselves and their clients some money....

There are some great firms that have made a ton of money for their clients over the past 6 or 8 years. It is these firms that will have the ability to come to some agreement with clients. Your run of the mill hedge fund that got clobbered...not so much. I am not suggesting this is for all firms, or even for many firms, but I believe that some will be able to do it.

Cpalms: incorrect, it is already being discussed "some", not many, but some will be successful in resetting. It may only be 25 out of 8,000 that are underwater. But it WILL happen.

waverly and patient09 are right. There will be some resetting of marks. It needs to happen to re-align incentives and prevent managers from throwing in the towel. But I don't think investors will just happily "give" such a serious concession, especially after losing their shirts. They will demand something in return - lower management fees, lower carry above the new reset, more redemption righs, something. Just an opinion, of course.

More broadly, I like the internet analogy. Like the internet, hedge funds have a reason to exist, and will stick around. Like the internet, there was a huge, huge bubble of "me too" firms. In 1999, eAnything could IPO with a huge valuation. In 2006, anyone who started a hedge fund could raise money (and make money temporarily). The shake-out will resize to industry to a more sustainable size, with the best firms surviving, hopefully.

Frankly, I'm thrilled that hedge-funds got killed last year. I only wish that the people who invested in them had lost more money. It's pure stupidity to agree to a 2 + 20 arrangement. No matter how brillant the people running the hedge fund, it just can't be profitable, over the long term, for an investor to pay out 2% off the top plus 20% of profits. That's the kind of juice you can't beat on a consistent basis.

I've heard it said that lotteries are a tax on the stupid. Hedge funds are a tax on the brain-dead greedy.

damn... my labia surgery link is gone from here too? WTF moderator... you want some too?

Depending on how you define the long term, hedge funds have been much more profitable than the general averages for the last 1,3,5 and 7 years. Using last year as example- S&P down 38+ Hedge Funds index (specious term) -18..That 20% differential means hedge guy needs 21% or so to get back to even vs S&P needed north of 60...That's just one year of huge magnitude but 00, 01 and 02 were similar. So, on average, despite that many of them have completely different strategies and have no idea what the other one do, as a group, they have come through the last 4 terrible years significantly better than all the indexes. And considering the S&P 500 is back at '98 levels, I would venture that those who's fund values are even in that ballpark are a) either looking for new work or b) working in the "family" office..Has anyone considered that the hedge funds, while having a very difficult year and losing hundreds of funds and hundreds of billions of assets, has absolutely punctured the "market asymmetry." aka- The mutual fund is completely bankrupted. Stocks for the "long term" has been discredited, and the senior population is set to explode. You think the standard mutual fund meets the needs of those investors. Forget it. That model is dead as fried chicken...Managed accounts, personalized offerings, enchanced disclosures and liquidity and rebuilding trust are all pieces of what the next model looks like, but for all the negativity regarding hedge funds, where rules were changed in them many times in 2008- no shorting, short position disclosures, the structural problems in this crisis was at the internal hedge funds/trading desks of the banks, not the independent players. Sorry, but a long way of saying hedge funds have added both relative and absolute value over the last long term range (1-10 yrs) and I would expect even better returns as many of the weak have been culled...

mjiam, i think you are unjustified in your opinion. hedge fund assets would not be down 58% if the industry was really outperforming the S&P by a margin of 20%. that's completely unrealistic. given that many funds have their assets locked up in one way or another, and that many have invoked clauses to prevent clients from withdrawing from the funds, it is just completely shocking that they are down that much. the hedge fund index concept is a completely self-serving industry tool to make returns look good.

i agree that many hedge funds will come to agreements with customers to reset, but in exchange for significantly lower fees. i think 1 and 10, flat 2 with no performance fee, and funds with no management fee and a 2% performance fee are going to become very common. other formulations--like only paying out a performance fee over a certain benchmark--will also be introduced.

the idea that hedge funds have 'added both relative and absolute value' is completely wrong and misunderstands the nature of asset management. funds do not 'add value, they redistribute value. we are not talking about venture capitalists or activists who take over companies and have the potential to add value to them .

by the way, i totally disagree that long-term equity investing has been discredited. after a huge sell-off is the time when long-term equity investing can be expected to do quite well. was long-term equity investing a bad idea after the sell-offs of the great depression? or of the 70s? or of 87? ummm...no. you would be quite rich if you had invested in a basket of public US companies after any of those downturns. this has been a horrendous year for equity markets, but it's been awful for private equity as well, for oil, for anything other than the safest of safe investments.

i say all of this as a hedge fund manager who charges 2 and 20 and has nothing resembling a long-term equity strategy. but if a friend asks me for unbiased advice on a good place to park his change, i'm going to be honest and say he could do a hell of a lot worse than an S and P index.

newbuyer - yes, I think there will be some concessions needed (less on the back-end?) to get the client to come along, but it will happen. Again, I am not suggesting this will happen left and right, just that it will happen.

I work at a hedge fund that had a solid year. (My fund was up high single digits.) We are getting redeemed because we are liquid and have no restrictions - most of our investors have been with us for far longer than their lock-ups.

I was going to answer mjiam, but figured someone else would do a better job than I would've. Which is what happened.

There have been studies at hedge fund returns, NOT the self-reported ones. Risk adjusted, they haven't beat the S&P over the last 15-20 years. Smartmoney did a piece on this...

nyc10022,

All hedge fund returns are "self-reported", as nobody has access to their numbers except their partners. There is no source of numbers other than what they report. Some of these academic studies are just BS based on extrapolated data not hard numbers.

It is nonsense to claim hedge funds have not done better than the SP500. First, because many are debt funds and should not even be benchmarked to the SP500.

If you look only at l/s equity, there is no doubt they handily beat the zero retun of the SP500 over the last 10 year, AFTER FEES. Including a big beat in 2008. Whereas equity mutual funds, with their "lower" fees, did not.

That said, there are plenty of bad hedge fund managers who just levered up and beat the SP500 due to leverage, not skill. Those guys can and will go out of business. The industry will shrink but those with talent will remain and prosper over time.

And if any hedge fund I was invested in even hinted at waiving the high water mark, after years of taking their 20%, I would redeem in a minute and blacklist their managers from any future investments.

The study benchmarked the funds to their relative indexes....

and they lost...

modern,

are you seriously stating that 'self-reported' hedge fund returns are more accurate than academic studies using extrapolated data? that has got to be a joke. if no one has access to their returns, then why should i believe their purported returns at all?

there are so many biases in the reporting of fund returns. how about this one: hedge fund company has a strategy starting with $50 million in investments, and it returns 20% a year for 5 years. these returns enable them to raise $2 billion to invest in that strategy, after which it performs at 5% a year. is the ten year average return 12.5%? or is it 6% a year?

if you don't want to benchmark hedge funds to the S and P that's fine with me. but they have to be benchmarked to something. the fact is, it is virtually impossible to return decent returns to clients over the long-term while collecting 2 and 20. it was hard when the industry had $50 billion under management. with $2 trillion (now down to $1 trillion) it's a hell of a lot harder. that's part of the reason why the $2 trillion just became $1 trillion. by the end of this year it could easily be down to $700 billion, with far lower average fees to boot. by any fair reading of the situation the hedge fund industry has been decimated.

by the way, given that approximately 3% of all hedge fund assets in the world were invested in Bernie Madoff (30 or so billion out of 1trillion) through feeder funds i think it's safe to say that average returns are going to have to be adjusted down.

Where is this "study"? Does it have a name?

First you said it compared them to the S&P, now you are saying it was to their benchmarks, I'd like to see the original study.

I'd really like to know how they got hedge fund returns that weren't reported. Do you know?

here is one of the studies. it's not particularly good because of the reporting rules you mention above, but it shows that hedge funds' long picks are very slightly ahead of mutual funds' before fees, so obviously would be significantly worse after fees.

http://www.businessweek.com/investing/insights/blog/archives/2007/03/hedge_fund_retu.html

> First you said it compared them to the S&P, now you are saying it was to their benchmarks

Yes, and the major benchmark was the S&P. Ones that used other classes were compared to indexes there.
Its really not that hard....

> I'd really like to know how they got hedge fund returns that weren't reported. Do you know?

They looked at holidings over time and did the calculations themselves.... including inflows and outflows...

I'll go look for the article.

Seriously, is there a reason you are so bitter here?

BTW, the article itself was the "create your own hedge fund" cover piece from last month.
Yes, ironic...

NYC - if I do, can I have some TARP money?

happyrenter,

that study you linked was insane. they looked at quarterly holdings of long positions only! they had no access to short information or anything that happened between quarters. worthless.

not worthless at all. the hedge fund managers were unable to pick long positions any better than mutual fund managers. you think that tells us nothing about their overall talent as managers? come on. as you rightly point out, it is virtually impossible to get unbiased information on hedge fund returns. and you think the takeaway from that fact should be that returns are great?

once and for all... the outsized hedge fund ("HF") returns were nothing more than a ponzi scheme based on greater liquidity. One hedge fund out of 1000, makes above market returns in 1999... (statistically insignificant).. .then junior partner goes I can do this... leaves and starts hedge fund 2... hedge fund 2 gets greater returns by employing the same trading strategy as HF 1 (their returns are highly correlated as they are the two buyers bidding up the same trading strategy)... then junior trader at HF 2.. "f" this I wantz me 2/20... goes start HF3... with the same trading strategy... as long a Banks/Funds give more liquidity into this nonsense... HF grows like mushrooms in a damp cave in Hawaii... They continue to generate above market returns as they employ same HF strategy as HF1... DO YOU F"N GET IT... all you I'm smarter than W67th HF managers... it is a fool who mistakes their intelligence for the market....

ayrton senna would be nothing if he drove for Hyundai....

By that logic, hedge funds should have done worse than the S&P 500 this year, not better.

Does anybody here know more than they read on the web about hedge funds? Like, actually, invest in them?

Does anybody think David Einhorn's returns for the last 15 years were just luck or leverage? Dan Loeb? Richard Perry? They all lost money this year, they all have great long term records, and none of them report their returns to any database (so reporting bias is not just to the downside).

modern,

you keep telling us that we have no way of knowing hedge fund returns so we should assume they are great? what i know is that hedge fund assets are down 58% in one year despite the locked up capital at many funds. this is a sign of a thriving industry? why am i supposed to believe that hedge funds did so much better than the S and P this past year if, as you point out, the returns are not reported to any database? this is just nonsense.

hedge funds are a compensation scheme, not an asset class or a type of investment. dan loeb is, by all accounts, a very talented investor. so is bob goldfarb (who runs a hated mutual fund and private accounts). the question is not whether there are some talented hedge fund managers. the question is whether it is a good bet that paying out 2% of assets and 20% of profits every single year is a good way to generate high returns over a long period of time. is it possible? probably is. is it likely? obviously not.

didnt Bernie MAdoff also have "great long term records?"

right--those self-reported returns modern seems so enamored of. and he still hasn't responded to my point that 3% of hedge fund assets in the world were just wiped out with the madoff scandal. how's that for returns?

They did a study of private equity returns (noted in same smartmoney article). They compared the self-reported stats to the actual redemptions and outflows and equity stake sales. Turns out the actual returns were SIGNIFICANTLY below reported.

Its the mark to market problem. The assets that tank, they keep on the books for more than they are worth.

But, not for long... government is going to break up the scam...

> 3% of hedge fund assets in the world were just wiped out with the madoff scandal.

And lets not forget that hedge fund stats included the reported 12% returns (that never existed).

nyc, do you have a lnk to that PE article? sounds interesting

trying to find it. I actually get the print edition.... not sure if it made it online.

don't get my started on private equity--even bigger scam than reported hedge fund returns. the college endowments are being absolutely destroyed by their PE investments. after paying their managers hundreds of million of dollars for these supposedly incredible private equity returns, they now discover that the returns don't exist. merry christmas.

the point of it is.... here is how you can mimic the hedging strategies... but, in actuality, avoid the real thing, the 2+20% isn't worth it.

happyrenter, absolutely.

The government will CLEARLY be sticking their nose into the business now, and America is not going to like what it sees...

Most of this discussion regarding returns relative to a benchmark assumes that hedge funds are either single strategy or equity biased.

Three points on private equity:

1) Totally true that self-reported returns are much higher than "actual" returns. Mark to market is one reason, but the bigger reason is just different ways to slice the numbers - GPs will always find complicated methodologies that make themselves look better. I've seen this firsthand multiple times. CALPERS-reported returns are considered the accepted industry metric (I think CALPERS is the biggest PE investor), and, as far as I know, are pretty accurate.

2) However, I think happyrenter's point about college endowments is wrong. Unlike hedge funds, carry in PE is only paid upon sales of investments, NOT on any hypothetical reported values. I don't believe there are any exceptions to this, even if I am wrong, they would be very, very rare. In many cases, you don't get ANY carry until you sell enough investments in the entire fund to assure that the carry is earned. In the cases where you get carry on every investment, there is (almost) always a clawback provision that you have to give it back if other investments tank, and the fund as a whole doesn't justify carry (which, by the way, is usually only paid if the fund return is over 8% after all fees).

3) College endowments and other investors are, in fact, getting burned by their PE investments, but for at least 2 different reasons.

(a) PE firms grew more and more aggressive, doing bigger deals and paying higher multiples with every year. When the music stopped, they had more money invested, at higher multiples, and with more leverage, than at any time in history. Will be tough to get any of equity value in those, let along getting out whole or making a profit

(b) Many PE firms sold to other PE firms. That counted as realized profit, so the selling PE firm collected carry. But if you're an LP in both PE firms, you're still in the investment, at a higher basis, and just paid carry to "get" that higher basis without actually getting any cash. Hypothetically, two firms could repeatedly sell the same company to each other at higher and higher multiples, keep collecting carry on each deal, and when the music stopped, just say "oops". I don't think it's been quite that egregious, but you get the picture.

"and he still hasn't responded to my point that 3% of hedge fund assets in the world were just wiped out with the madoff scandal."

I give up. You are clueless about even the basics of hedge funds. Madoff was NOT a hedge fund and most of the losses were individuals who directly invested with him or through fund of funds, which are also NOT hedge funds.

And if you were in the hedge fund industry, you would have access to many hedge fund numbers, such as Third Point, Greenlight, and others, and you would see how well they have done over many years. Since you don't have their numbers, I have to assume you are not in the business, and are just making up stuff.

Greenlight Capital (David Einhorn) was down 22% this year. Bad, huh, what a loser, right? How about the 12 previous years of profits (net of those high fees you hate), so over the last 13 years his annual average returns are 21%. He beat the S&P 500 every year but one. That is 21% annually compared to the S&P500 index funds you are recommending of 4.3%. So early Greenlight investors are up 985% versus the S&P 500 up 72%.

Yup, no way he deserves to charge 2 and 20 for that kind of crappy performance.

modern: 2 and 20 is cheap for a manager with a proven track record. On the other hand 6% is expensive for an uneducated waiter looking for a better gig

modern and patient, i agree that you will pay fees for managers that truly deliver uncorrelated and consistent absolute returns. whether or not fees should come down over time because current managers (even good ones) are overpaid is another issue altogether. but my issue is that this year, the tide went out and guess what - 80% of managers were not wearing bathing suits! It begs the question as to whether many managers were simply dressing levered beta up and calling it alpha and quite frankly, whether many managers were fit to manage money at all much less earn 2 and 20 doing so.

S K: The real issue with swimming with no bathing suits, is the investors, not the managers. Ignorance and greed is a nasty combination. Just ask Madoff's victims. They will all tell you they were one of the two, or they are liars. The managers were simply not as good as they thought they were, greedy, or both. Remember, there were exponentially more dollars NOT given Madoff, that took a pass, than those that were given.

"3% of hedge fund assets in the world were just wiped out with the madoff scandal"

- considering that HF's did not invest with Madoff (HNW individuals did) nor was he a HF so this an apples to orange conversation

let's get the facts straight...

oh yeah, if you have a bad year you dont get the 20...its funny cause the HF's have 10x more accountability than the banks / broker dealers do...you do well you get paid, you do bad you dont...your a bank / broker dealer well you know the answer

I think most of the hedge fund disasters have been the recent funds started by ex traders from big name firms who raised billions to start (mostly from FoFs), and had little of their own money in the funds. The great funds usually were started with small amounts of capital and attracted more with results, not marketing. I met Dan Loeb when he was a one or two person shop in the old Bear Stearns hedge fund hotel at 230 Park, I think he had well under $100 million back then. He now has billions of AUM and probably hundreds of millions of his own funds, so it tends to sharpen your risk managment skills when your own money is at risk.

I suspect we go back to the old model, hedge funds will start small, and those that do well will attract capital. The days of billion dollar launches are over.

And FoFs are pretty much toast. They never made much sense and their horrible performance this year has everyone running for the exits. (which is why even profitable hedge funds are getting redemptions).

And a comment on "self-reported" returns. Yes, they report unaudited returns monthly. But the annual returns are audited so any fund that has been in business for more than a year, those returns have been audited by an outside auditor. And almost all funds now use outside administrators, who value assets and report returns monthly to investors.

Never, ever, invest in a hedge fund without a well-known outside auditor and an independent administrator. UBP, a victim of Madoff in their FoFs, has said they wil redeem from funds without one (closing the barn door a little late).

modern,

apparently you have little or no familiarity with the madoff situation, and i must say that your over-awe at any and all famous hedge fund managers is not the sign of a seasoned industry veteran. the majority of madoff assets were through feeder funds. a fund of hedge funds is presumed to invest in....hedge funds, no? Fairfield Greenwich and Tremont alone had over $10 billion with maddoff. so please don't try to tell me that the utter disappearance of these assets has no impact on reported hedge fund returns. madoff was not a hedge fund, but the majority of his assets were through these funds of funds and the individuals who made those investments in tremont, fairfield, et al sure thought they were in hedge funds.

but the larger point is that, again, black box investing is absolutely crazy. the madoff scandal was enabled by black box investing, and as you keep saying, again and again, the hedge fund industry runs in significant part on the black box model. yes it's important to have an auditor, but then, madoff had an auditor. so you add the stipulation that it should be a good auditor. i agree. but madoff was investigated and cleared by the sec. even short of more massive fraud (which is probably out there) there is all sorts of borderline-fraudulent activity out there.

garelj,

i hope you are kidding me by saying that with hedge funds you only get paid if you do well. that's simply not how the model works. you get a share of profits on any returns above zero. you get a management fee no matter what the returns. it is an enormously lucrative model for managers.

anyway, it seems to have stagnated into a debate between me and a bunch of guys who think that -58% in assets is a great year, so i'm withdrawing from the field.

However, if you had a bunch of jake to invest in a diversified portfolio of the following industry groups in calendar year 2007 and 2008:

1. portfolio of commercial banks
2. portfolio of insurance companies
3. portfolio of monoline insurers
4. portfolio of investment banks
5. portfolio of finance companies
6. portfolio of mortgage companies
7. portfolio of hedge funds

which would you have been happier with?

that's the universe of possible portfolios, ok.

no silly goose, but if you were invested in leverage finance as part of your total portfolio, these were some of your choices. if you chose #7, you wouldn't be as unhappy you could have been

if you'd buried your money under your pillow you'd be even happier. so...

or rolled it up and smoked it

Recall that with 1000 orangutans flipping coins a certain number will flip heads 10 consecutive times just by chance!

They undoubtedly will claim that their 2% and 20% fees are quite reasonable.

I'm comfortably skeptical.

Most hedge fund investors, of course, will trail what they could have earned with a good balanced account with very low fees.

you are way wrong about all funds being self-reported. signed, hedge funder

Interestingly, I think both sides of this hedge fund debate are (at least somewhat) right. As I mentioned way above, I agree that there are some managers that are so damn good that they deserve their 2 and 20, or even more, in some cases. In fact, happyrenter must think he is one of them, or will be become one, since he runs his own fund. However, I also agree that those few are the exceptions, with most managers swimming without bathings suits, as has been pointed out. The exceptions who are truly good will survive the shakeout. The vast majority of the naked swimmers will not.

Incidentally, that original purpose of this thread, and it's tie to NYC RE, was not damning the entire hedge fund model, but simply stating that the numbers of well-earning managers will be greatly reduced. Sounds to me like everyone on this thread agrees with that.

its, not it's, sorry. One of my pet peeves, can't believe I was guilty of it.