What happened to hedge funds?
“There was a time when we were the disruptors.”
I was having lunch earlier this year with an old friend who had gotten in early with hedge funds, and he was stuck.
“We used to go into meetings with company management, elbow our way past sleepy mutual fund investors and ask the tough questions.”
The industry wasn’t as fun, successful or invigorating.
“They didn’t have a chance against us. We had the returns to prove it.”
The questions. The ability to go short. The leverage. They stomped on mutual fund returns in the late nineties and even early 2000’s. Now everyone in the hedge fund industry seemed to be fighting over the same scraps. Now there weren’t enough returns to go around.
When did hedge funds become so boring? Hedge funds used to be the disruptors. They were gunslingers and gamblers and, at bottom, insufferably successful investors.
The glory days of stepping off the trading floor at Goldman Sachs, hanging out a shingle for investors, and turning away money have passed. But they were real. Eton Park actually turned away “several hundred millions dollars” while raising $3.5b in one go, and investors were more than willing to accept onerous lock-ups for the privilege. Hedge funds were disrupting traditional institutional investment approaches and investors couldn’t allocate money to hedge funds fast enough.
I saw it first-hand. As part of the founding team at Gerson Lehrman Group, we were the beneficiaries of the macro shift to hedge funds and their insatiable research demands. When John Griffin of Blue Ridge Capital told Mark and Thomas to stop publishing reports and make a business out of connecting him to our authors, doctors and consultants, the expert network was born. We didn’t just have product-market fit. We had product-market-macro fit. The torrent of hedge fund growth channeled into a firehose of new clients, revenue and growth for the business.
But today, the largest pensions and investors are turning away from hedge funds. Calpers became one of the largest allocators to exit hedge funds in 2014. Interim CIO Ted Eliopoulos pulled $4b from 24 hedge funds and six funds of funds – $700m from Och Ziff, alone. Eliopoulos blithely said, “Hedge funds are certainly a viable strategy for some.” New York City Employees’ Retirement System (NYCERS) would do the same in 2016, divesting the 2.8% of its $51b portfolio allocated to hedge funds: $1.45b. The Illinois State Board of Investment cut their hedge fund allocation by more than two-thirds: from 10% to 3% of the overall portfolio. The New Jersey Investment Council would cut its allocation to hedge funds, which stood at $9b, by 52% for the 2017 fiscal year.
Hedge funds went from the disruptors to just another mainline institution like the long-only mutual funds they had disrupted at the turn of the century.
The question today is, what will disrupt them?
