Hedge funds have lost a lot of their luster lately: They charge hefty fees to oversee some $3.2 trillion of investments, yet usually underperform low-cost index funds. Now, as global stock markets swoon, erasing more than a trillion dollars in market value (paywall) in a matter of days, hedge fund managers have a chance to prove their worth.
These managers have lagged behind the S&P 500 index of stocks for 10 of the past 12 years, according to HFR data. Money has poured into hedge funds anyway, with industry capital rising by $59 billion in the last quarter of 2017, the research group said. That’s despite high fees—hedge funds traditionally charge an annual fee of 2% of total assets, on top of 20% of any profits earned. (Vanguard’s S&P 500 index fund charges a fee of just 0.04% of assets.)
Given their name, you would think hedge funds might provide a cushion when markets are in turmoil. The name “hedge fund” is something of a misnomer, however, given the diverse range of strategies on offer, many of which bet on markets rising in value—as they have for years, before the recent reversal.
As it happens, the last time the overall hedge fund sector outperformed the S&P 500 was in 2008, when global markets were tumbling during the worst financial crisis since the Great Depression. Even if the current downturn proves less severe, the stakes are high for hedge fund managers.