Most hedge funds fail. Inexplicably, demand remains as strong as ever. The question is why.
In the final analysis, is a hedge fund nothing more than a short-term owner operated fee extraction business? The NYT reports another handful of funds calling it quits, with managers citing all sorts of issues except the main one--an inability to make enough money for the clients to justify their lavish fees. They will return money to investors and focus on managing their own wealth.
The NYT reports--and we concur--that the average hedge fund earned less than an intermediate term corporate bond fund last year. The Financial Times Alphaville blog has published an excellent series on the "Zombie Hedge Fund Industry," and that most hedge funds fail. From John Lanchester in the New Yorker:
"Most hedge funds fail: their average life span is about five years. Out of an estimated seventy-two hundred hedge funds in existence at the end of 2010, seven hundred and seventy-five failed or closed in 2011, as did eight hundred and seventy-three in 2012, and nine hundred and four in 2013. This implies that, within three years, around a third of all funds disappeared. The over-all number did not decrease, however, because hope springs eternal, and new funds are constantly being launched."
Don't lose any sleep for the owner-operators however. Even a modest ability to raise assets and hang onto them for the average lifespan of a hedge fund can leave the owner-operators with 7, 8 and even 9 figure fortunes, garnered from the typical confiscatory fee arrangement of a hedge fund.http://www.nytimes.com/2015/05/18/business/dealbook/facing-low-returns-and-balky-investors-more-hedge-funds-close-doors.html?src=me&_r=0