The View | Over the hedge

Hedge funds are facing a prolonged death rattle as their managers tenaciously cling to their beliefs that they have the sustainable ability to consistently beat the market even though signs are saying otherwise. Hedge fund managers used to represent some of the smartest, creative and audacious thinkers and investors. Today, they are facing obsolescence from rapidly changing technology and regulations.

The California Public Employees Retirement System (Calpers), the largest pension fund in the US, recently announced that it planned to eliminate all US$4 billion of its hedge fund investments over the next year. Calpers' decision looks small relative to its own US$300 billion size and the US$2.8 trillion hedge fund industry. However, the overarching reasons for its decision resonated with many investors. Hedge funds have become too complicated and costly. Superior, cheaper and more transparent alternatives and substitutes are starting to replace them.

Financial history suggests that times of high risk and uncertainty also offer big opportunities. However, hedge fund managers have been unable to capitalise on any of these fronts over the last five years. Their nemesis has been the S&P 500, which has returned more than 100 per cent in that time.

Many Asian hedge funds are long only and do not seem to offer enough uncorrelated performance to market indices. It was easy for them to be outperformed by their respective benchmarks. Managers point out that assets under management have grown over the last five years for hedge funds. According to data from Hedge Fund Research, almost US$57 billion has flowed into hedge funds in the first half of this year, reflecting investors' demand for more returns. However, the industry has become more concentrated towards larger, established hedge funds.

New or smaller hedge funds have experienced difficulties in raising money and surviving waves of redemption. Even experienced managers with verifiable track records have been unable to raise US$50 million to US$100 million from private sources, which is a starting point for new hedge fund operations.

Increased global regulations demand so much compliance and reporting that system costs have become prohibitive for new entrants. Before the financial crisis, a hedge fund manager was anyone who held a Blackberry with a mobile trading application and a spreadsheet for monitoring positions.