A lengthy piece in the New York Times online profiles Kenneth C. Griffin, who built the Citadel Investment Group into one of the largest hedge funds in the world. Aside from documenting Citadel’s fall from grace last year, the article highlights some notable trends in the industry.
Two out of three hedge funds lost money last year. According to the terms of agreements with investors, they’re supposed to recoup those losses before starting to take fees on profits again. This could take years, notes author Louse Story, and it’s possible many hedge fund managers will not have the patience to stay in business long enough to reach that point.
Hedge funds tend to close by choice, rather than outright collapse. Usually the end comes when the manager no longer sees enough of a personal financial upside to continue.
Nevertheless, at this point, few hedge funds have actually bolted the doors. According to data from Hedge Fund Research, the total number of hedge funds peaked in early 2008 at 10,233 and that number has fallen only 4 percent so far. Hedge funds still manage at least $1.6 trillion in assets.
But among the funds which lost money, the average loss was 29 percent. It would take years of robust gains to recoup those losses. Until then, the managers would only earn their 2 percent management fee – something that may be hard to swallow after so many years of 20 percent slices of the profits.