While some are shocked by Calpers' decision to abandon hedge funds as an investment class [7] (the first of many such "exits"), there really should be no surprise here. As we have said year after year after year (and so on), it was only a matter of time before limited partners said "enough" and stopped paying 2 and 20 to overpaid asset managers in a world in which central banks have "guaranteed" there is no longer any risk, just to underperform the market for a whopping 6 years in a row [8] now. And to showcase where Calpers decision came from here are just two charts.
The first is from Goldman showing YTD performance by major asset class, with an emphasis on various hedge funds, and how for the sixth year in a row, hedge funds have underperformed the S&P.
[9]
Wait, six years? Impossible. Oh no, quite possible. The chart below shows that while the S&P is soaring into the stratosphere on the back of endless global liquidity injections (as a reminder, none other than JPM recently reported that global excess liquidity was at an all time high [10]and going higher), as today's latest news out of China definitively confirmed, hedge funds returns have yet to surpass their cycle highs.
[11]
And then of course, there's this: "90% Of Hedge Fund Managers Are Overpaid Relative To "True Talent [12]""
The fees, which still make up as much as 2 percent of a fund’s assets, represent a disproportionately high share of the total remuneration unrelated to performance, said Nicolas Rousselet, head of hedge funds at Unigestion. To align managers’ pay more with performance, the fund industry should either abandon the management fee or combine it with a hurdle rate that one must achieve before collecting incentive fees, he said.
"The philosophy of the hedge-fund industry, as it should be, is to remunerate true talent,” Rousselet said in a telephone interview on Sept. 9. “Fund managers should be remunerated when they perform. They should not be remunerated for doing nothing.”
Fees are coming down amid efforts to win mandates in an industry that traditionally charges about 20 percent on performance and 2 percent on the total assets. Investors paid an average 1.69 percent last year, with the share of those who paid 1.5 percent or more at 79 percent, almost unchanged from 2012, according to a Deutsche Bank AG survey published in February.
“Hedge-fund managers should work harder to justify the fees that they earn.”
But while it is easy to bash hedge funds for consistently generating underwhelming returns (and being massively overpaid for it), it really is not their fault: the fault is not in our stars, dear Brutus, but in the Fed, and whoever the Chief Risk Officer of the "market" may be at any given moment. Because in a centrally-planned world in which markets are not allowed to decline, hedging as a concept is made obsolete.
After all, there is no risk.
Until there is. And the biggest irony will be that the Fed's idiotic policies, now in their 6th year, will ultimately demolish the only asset manager class whose job is to "hedge" risk, and just as the market crashes, there will be nobody left hedging said crash.
Which, to some at least, will be poetically symmetric.
