Everybody Out of the Pool. Institutional investors large and small are beginning to question the hedge fund value proposition. It's about time.
The 20 October edition of The Wall Street Journal carried an interesting - and predictable - article about the second thoughts and buyer’s remorse currently making the rounds among hedge fund customers.
We say predictable because the great state of California (in the august form of CalPERS) started a rush for the exits when they announced earlier in the month that they would be abandoning their positions after experiencing too many performance disappointments and too big a bite out of their fee budget.
That move sent a chill through the institutional investment world, a chill that was well overdue, in our opinion. According to the WSJ, other Funds and Plan Sponsors are making similar moves, either rethinking a pending commitment to hedge funds or backing out of existing positions. (Good luck with that, by the way.)
In our view, this is a healthy and timely development, even considering the dislocations that are bound to ensue. The hedge fund industry in its current guise is essentially a fee-taking mechanism masquerading as an investment category. There may have been a time when specific managers possessed of “special insights” could spin-out results that substantiated their fees. But at the end of the day, most hedge funds relied on leverage to generate their returns and those returns in the aggregate have quickly gravitated toward the lowest-common-denominator territory of Two-Year T-Bills.
There is nothing wrong with T-Bills but paying a 2 & 20 fee to get those returns seems way out whack to us. An orderly retreat from this unrewarding field is clearly in order.