Bloomberg Businessweek - USA (2020-08-03)

21

PHOTO

ILLUSTRATION

BY

TREE:

GETTY

IMAGES.

CHAINSAW:

SHUTTERSTOCK

offering to cover 100%ofanylosses,orwhatis called

full-loss insurance. In exchange, the firm will charge

half of the profits generated.

Standout returns in the 1990s, fueled by celebrity

managers such as George Soros and Seth Klarman,

helped hedge funds command exorbitant prices.

One selling point was that the funds had the flexi-

bility to pursue strategies other money managers

couldn’t. They might make big bets on assets declin-

ing in value as well as rising, or even make money

on the market’s volatility.

Hundreds of billions of dollars in assets flowed

into the industry as returns flourished. The riches

filled the coffers of hedge fund managers and

created larger-than-life characters who splashed

their fortunes on luxurious lifestyles, bought

expensive artwork and sports teams, and funded

political campaigns.

The gilded era began drawing to a close after

the 2008 financial crisis. Returns slumped as cen-

tral banks flooded the market with cheap money,

upending traditional relationships between asset

classes and economic data. Volatility fizzled, and

many managers struggled to profit from betting

against stocks as markets entered their longest bull

run in history. In 2014 the largest U.S. pension fund

decided to exit hedge funds altogether, a decision

thatwashighlysymbolicofthe industry’s decline.

California Public Employees’ Retirement System

dumped $4 billion of such investments, citing com-

plexity and costs.

Over the past decade, hedge funds have pro-

duced less than a third of the annual returns of

stocks. And in the first half of 2020, hedge funds

lost 3.4%, slightly more than the decline in the

S&P 500 with dividends included, another under-

whelming performance for an indumstry that tra-

ditionally promised to protect, or hedge, against

losses in bad times.

One of the industry’s most influential consul-

tants, Albourne Partners, has proposed a radical

overhaul of the hedge fund compensation struc-

ture to align the interests of managers more closely

with their investors. Under what Albourne dubs

the “1-or-30” model, in a good year, fund manag-

ers would take 30% of returns and no annual fees.

In a bad year, they would still be able to charge a

1% management fee that would be deducted from

the following year’s performance payout. That

model is gradually gaining wider acceptance since

Albourne first proposed it in 2016.

The industry continues to point to the enormous

gains it’s made for investors over the years. Hedge

funds overall have generated almost $1.3 trillion

August 3, 2020

“Fees in the

industry are

still twice

what they

should be”

BloombergBusinessweek

G

e

t

(^) C

h

o

pped