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The barrage began with Warren Buffett.
Two weeks ago, the legendary investor called the compensation at hedge funds "unbelievable" and said pension funds would be much better off investing in a stock market index. Bill Gross, one of the world's most renowned bond investors, jumped in next. Hedge fund fees are a "giant rip-off" that send "investors to the poorhouse," Mr. Gross wrote on Twitter.
But perhaps the cruellest blow was the closest to home. The same day, Steven Cohen, a billionaire hedge fund pioneer, complained at a conference about the difficulty of finding quality traders. "Frankly, I'm blown away by the lack of talent," said Mr. Cohen, who added that the industry had become "crowded" with a glut of players pursuing similar tactics.
Some of the shine is coming off the $3-trillion (U.S.) hedge fund industry. Increasingly, investors and managers are posing tough questions about its structure: Are there too many players, charging overly steep fees, often using copycat strategies?
The current sour mood surrounding the industry stems from several factors. Last year was a disappointing one in terms of performance, with hedge funds over all down 2 per cent, according to an aggregate index from research firm eVestment. Meanwhile, some of the biggest names in the industry – such as Bill Ackman of Pershing Square Management LP – posted huge losses and others shuttered funds entirely. The market turbulence in the first quarter of this year posed a new challenge to battered managers.
Institutional investors are voting with their feet: In the first three months of 2016, they withdrew a net total of $14-billion from hedge funds, according to eVestment, the worst first quarter in terms of investment flows for the industry since 2009. And that follows total redemptions of $27-billion in the final quarter of last year.
Some large investors haven't hesitated to voice their dissatisfaction. Last month, the New York City Employees' Retirement System, a pension fund for municipal workers, said it would exit all of its hedge fund investments, asserting that it could find cheaper ways to reach its desired mix of risk and returns.
Letitia James, a citywide elected official, launched a parting salvo. Hedge funds "have underperformed, costing us millions," Ms. James said in remarks to the pension fund's board members. "Let them sell their summer homes and jets, and return those fees to their investors."
For some in the hedge fund industry, the combination of difficult market conditions and too many players means things are headed in only one direction. Dan Loeb, the founder of Third Point LLC, wrote in a letter to investors in April that the first quarter was "one of the most catastrophic periods of hedge fund performance that we can remember since the inception of this fund." The upshot: "There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies."
Peter Laurelli, global vice-president of research at eVestment, noted that the recent withdrawals, perhaps unsurprisingly, have been concentrated in funds of all sizes that performed poorly last year and also in smaller funds with lukewarm returns. "It's a case of certain products not living up to expectations," he said. The withdrawals in the first quarter were focused on funds that deploy "event-driven" strategies, which seek to profit on situations such as acquisitions and bankruptcies, and in "macro" funds, which make bets on macroeconomic variables such as currencies and interest rates.
For some experts, the hand-wringing is overdone. Don Steinbrugge of Agecroft Partners, a hedge fund marketing and consulting firm, said there is a perennial nature to such complaints. "I've seen this story before – 'hedge fund fees are too high, performance isn't good, everybody's about to bail out,'" Mr. Steinbrugge said.
He doesn't think investors are rushing for the exits, though. But Mr. Steinbrugge does believe the industry "is getting close to a saturation point" where total assets aren't likely to increase any further and the number of hedge fund closings will rise.
In particular, he cautioned that some of the largest funds may be too big to do well for their investors. Some players, for instance, have been caught in so-called "hedge-fund hotels" – stocks that attract a number of large funds making the same one-way bet, exacerbating the damaging consequences if the gamble fails.