NEW YORK - Hedge funds are facing a moment of truth. As big-time firms including D.E. Shaw, TCI Fund Management and Baupost look to raise more cash, the $3.6 trillion industry is on trial. Its lackluster performance for the past decade – out of line with its high fees – has often been blamed on low volatility and markets that keep rising. The time for excuses is over.
Hedge funds charge hefty fees – traditionally 2% of assets under management and 20% of returns above a certain level – for so-called expertise in strategies that go beyond simply buying stocks. The trouble is, over the past several years, most haven’t shown they do any better than a low cost ETF fund. The Preqin All-Strategies Hedge Fund Benchmark notched a mere 11.5% return last year, underperforming all major indices. And this was considered an improvement. It was only the second time in six years that metric reached double digits.
Access to cash now should, in theory, help some funds reverse this trend. Boston-based Baupost only posted high single-digit returns last year. But it went into this crisis wisely holding a significant percentage of its portfolio in cash, allowing it to deploy at least $1.5 billion into weak markets. Having ready cash piles means funds can invest at depressed prices to lower their average investment costs – possibly leading to high returns in a recovery.
Some firms that have bucked the underperformance trend are also looking for more dosh. Ken Griffin’s Citadel should be able to add to its $30 billion pot with its newly registered fund – especially when its Wellington fund was up around 4.5% this year through last Friday. And D.E. Shaw has already racked up $2 billion in new commitments.
But everyone probably needs to move fast. More dramatic market shifts are likely despite the recent rally, yet this isn’t a normal crisis. It has moved with unprecedented speed. And governments around the world are pumping enormous sums into markets. The outcome is unpredictable, but the window to snap up bargains might close quickly. And for many hedge funds, this missed opportunity could be their last.
- Citadel registered the new Citadel Relative Value Fixed Income Fund with the Securities and Exchange Commission on March 16.
- D.E. Shaw has opened its Composite fund to new capital for the first time in seven years. The new capital commitments are capped at $2 billion, the fund has commitments for this full amount, and it will have access to the cash as of April 1.
- TCI Fund Management and Baupost are also looking to raise additional capital, according to news reports.
(Editing by Lauren Silva Laughlin and Amanda Gomez)
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