Hedge funds are doing a lot better attracting money than they are making it for their investors.
While the Standard & Poor’s 500 Index has gained 14 percent so far this year — before dividends — hedge funds have returned only 3 percent, according to research firm eVestment, CNBC reports.
At the same time, hedge funds had an inflow of more than $20 billion from investors in the first half of the year.
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Given the fact that hedge funds charge investors a lot more than standard mutual funds do — often 2 percent of assets and 20 percent of profits — some are starting to question the wisdom of this asset class.
"Could the underperformance be cyclical or is there a structural change that has changed the return structure for the hedge fund industry?" Mary Ann Bartels, an analyst at Bank of America Merrill Lynch, writes in a report.
"We continue to conclude as in prior research, that there are likely too many hedge funds chasing too few returns."
Some experts say the problem is that hedge fund managers, with many institutional investors in their funds, are shying away from risk.
Going forward, "the industry will split between managers who are playing to win and those who are playing not to lose,” Kevin Gundle, co-founder of Aurum Funds, tells The Wall Street Journal.
“It's a very different mindset. New hedge funds will be born out of smaller, capacity-constrained managers with key risk takers."
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