Increased regulation, volatile markets and heightened investor scrutiny have prompted hedge funds to close their operations in recent months to focus on managing their own wealth, Alexandra Stevenson writes in DealBook. Shutdowns in the industry are not new – in past years, titans like George Soros and Stanley F. Druckenmiller have closed their hedge funds to manage their own money – but these days, hedge fund managers are complaining about external factors that make it more difficult to make money, like the regulatory changes brought about by the Dodd-Frank Act. For Gideon King, of Loeb King Capital Management, running a hedge fund had just become “too cumbersome,” as he said in January in a letter to investors. “As the endless quest for becoming institutional continues on, the soul of investing might get lost, as the unmitigated compliance processes become cumbersome and interfere with the purity of speculative contemplation,” he wrote.
Disgruntled investors are putting more pressure on hedge funds as well, angry about high fees for low returns, Ms. Stevenson writes. The average hedge fund returned 3 percent last year compared with a 13.7 percent gain for the Standard & Poor’s 500-stock index, and many investors are choosing to express their displeasure by withdrawing their money. “If you have enough money and on top of that it’s a tough market and you don’t want to deal with investors asking about performance, you can take the high road and say, ‘Here’s your money back,’ ” said Steven Nadel, a hedge fund lawyer at Seward & Kissel.
Even as some investors withdraw their money, a greater number are pouring money into hedge funds for the first time, bringing the industry’s assets under management to nearly $3 trillion. That has made it difficult for hedge funds to carve out a niche, especially among activist investors, who buy a small stake in a company to pressure it to make changes. “So many hedge fund managers are turning into activists that companies often discover that more than one activist has a plan for how they can change,” Ms. Stevenson writes.