Why are previously successful hedge funds failing?Subscribe
I work for a LO manager. I have a little less than five years in the industry although have prior work experience. We do fundamental work and average a two year holding period. I see opportunities to generate relative outperformance in many places. I do not think it is easy but would think it is possible for the collective intellectual capabilities of previously successful hedge fund managers.
So I am really curious as to why these funds are failing sort of en masse (, , , etc.)? I recognize that some of these funds are macro-oriented but I feel like even the equity-focused long-short players have struggled as well.
I have a couple of hypotheses. These are based on trying to identify something that has changed over the last say five years or so.
For macro funds maybe QE everywhere has distorted historical relationships. Government intervention is notoriously unpredictable, especially for the libertarian hedge fund crowd that may be less amenable to "non-rational" thinking.
But more focused on long-short/stock-picking funds, what has changed?
Another possibility is the rise of high speed. It seems to me that a good number of hedge funds historically have been founded by "traders" (as opposed to say an guy). A trader generates by having short-term information advantages. I suspect that the ability to exploit these short-term advantages has been eroded by high speed trading. For a generic example, "word" comes to connected hedge funds that numbers are too low for a given company. They begin to initiate a position but algorithms pick up on the trade and increase the cost. There may be other variations of this theme.
I acknowledge headwinds from the publicity associated with the fee structure and/or historical claims of consistent quarterly outperformance. The former has no effect on performance. The latter does but funds have always pitched this.
For those of you in the industry, what has changed?
Or maybe I am mistaken that the long-short fund industry is struggling?