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Investing in 90 percent of hedge funds isn’t worth it: critics

By
Carleton English
Published Dec. 7, 2016, 11:08 p.m. ET

Most of the smart money is actually pretty dumb, one hedge fund critic said Wednesday.

So dumb that of the 15,000 hedge funds in the US, only 1,500 are worth investing in, the critic lambasted.

“Ninety percent of hedge funds are not worth their fees,” Chris Solarz, managing director of New York hedge fund advisory firm Cliffwater, said at an investor conference on Wednesday.
Those are some harsh words, but the data backs Solarz.

While the S&P 500 index gained 7.6 percent through Nov. 30, the broader hedge fund industry was up a paltry 4.6 percent, net of fees, over the same period, according to Hedge Fund Research data.

That 3 percentage point performance gap between hedge funds and low cost index funds is significant because hedge funds typically charge a 2 percent management fee and 20 percent of profits.

“If you pay for the Ferrari, get the Ferrari,” said Betsy Battle, founder of New York’s Lone Peak Partners and a protégé of hedgie luminary George Soros, of investors who pay high octane fees hoping to beat the S&P 500 — but end up with a clunker of a portfolio.

Smart money has been paying attention, though, judging from the hedgie exodus: so far this year, $77 billion has left the $3 trillion industry and 61 percent of funds recorded net outflows in October, according to eVestment data.

Some of the biggest detractors have been big pension funds, which have made headlines by paring their exposure. Others have eliminated them.

This year New York City, New Jersey, Rhode Island and Illinois pledged to withdraw as much as $7 billion from their allocations.

Amid redemption pressure, several funds are lowering their fees.

Bill Ackman’s Pershing Square, which is down 13.5 percent through November, is killing the performance fee on the first 5 percentage points of profit. Above that level, the fund takes 30 percent of profits.

Other hedgies, such as Brevan Howard, Tudor Investment and Och-Ziff Capital Management also lowered management fees this year.

“Not everything is rosy in the hedge fund industry. We do need to evolve, there is no question of that,” said Don Steinbrugge of Agecroft Partners and conference host.

In fact, Steinbrugge agreed with Solarz’s contention that only 10 percent of hedge funds are worth their fees — meaning only 1,500 funds are worth their salt.