What Is Really Behind the Decline in Hedge Fund AUM?
Hedge funds and Republicans have at least one thing in common—media pundits rarely pass-up an opportunity to take a swipe at them when they falter. And hedge funds have faltered. Hedge fund assets under management (AUM) fell below last year’s hard won $3 trillion dollar high water mark.
Many would argue that hedge funds have lost their compass but, such an assessment would be unfair. There are three principal reasons behind these losses in AUM and numberless ancillary ones.
The Growing Gap between Fees and Performance
Battles over the merits of hedge fund fee structures were raging even prior to CalPERS announcing its intentions to substantially reduce levels of hedge fund investments
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Market Realities
Institutional investors are not immune to the criticisms heaped upon hedge funds by the chattering class and financial media pundits. Any politician will tell you that even a big lie, oft repeated, will eventually be regarded as fact. While it is true that almost all institutional investors know better, they do have people to whom they must answer. In many cases, the people to whom they must answer have bought into the media hype.
Hedge fund professionals recognize that when hedge funds are underperforming the S&P 500 it is financial front page news. However, when the reverse is true—crickets! For example, the S&P 500 was 5.47 percent from its December 31st close at the end of February. Hedge funds, on the other hand, were down one-half that number at -2.55 percent. Of course, this doesn’t earn the industry any bragging rights, but, in fairness, the industry was outperforming this frequently cited benchmark by a substantial margin.
Increased Competition
Hedge funds are not alone in the universe of alternative investments. There is competition aplenty for investor cash. These include, but are not limited to, private equity, venture capital, real estate, infrastructure, private debt and natural