Key Takeaways
- • Hedge funds returned an average of 6.96% in 2019, significantly underperforming the broader stock market, according to Eurekahedge data covering 85% of the industry by November reporting.
- • The industry experienced substantial capital outflows, with investors withdrawing over $130 billion from hedge funds during 2019, reflecting widespread dissatisfaction with returns and performance.
- • Hedge fund closures continued to outpace new launches for the fifth consecutive year, with many funds shutting down due to rising operational costs and sustained underperformance.
- • Despite the sector-wide weakness, performance dispersion remained significant, with some managers reporting gains exceeding 50% while others posted substantial losses during the year.
- • Hedge funds' underperformance persisted across market conditions: in the seven years with positive equity market returns, hedge funds underperformed the S&P 500 by an average of 2%, contradicting their theoretical purpose of downside protection.
Summary
Hedge funds closed 2019 with disappointing returns that substantially lagged equity market gains, crystallizing a multiyear period of underperformance and capital flight from the industry. According to Eurekahedge data compiled from 85% of hedge funds reporting through November 2019, the sector delivered an average return of 6.96% for the full year—a weak result relative to the S&P 500's substantially stronger performance and emblematic of structural challenges facing active managers.
The weakness translated into severe capital destruction and industry contraction. Investors withdrew over $130 billion from hedge funds during 2019, a striking vote of no confidence in active management and hedge fund strategy. The industry is now on track to record more fund closures than launches for the fifth consecutive year, a historic reversal for a sector once celebrated as a wealth-creation engine. According to available reports, many hedge funds were forced to shut down due to a combination of rising operational costs, persistent underperformance, and investor redemptions, with surviving funds often returning capital to investors or operating with severely reduced asset bases.
The underperformance challenge extends beyond 2019 alone. Historical analysis reveals a chronic lag: across the seven years when equity markets generated positive returns, hedge funds underperformed the S&P 500 index by approximately 2% annually on average. This structural underperformance contradicts the fundamental premise underlying hedge fund investing—that sophisticated managers would deliver downside protection through hedging strategies, accepting modest underperformance in rising markets in exchange for capital preservation during downturns. Instead, hedge funds have frequently failed to deliver either component of this promise.
Performance dispersion within the hedge fund universe remained pronounced, indicating that manager skill rather than broad industry trends dominated individual fund outcomes. Some managers reported gains exceeding 50% during 2019, while others posted significant losses, reflecting divergent strategy exposures and execution quality. This wide distribution suggests that investor capital increasingly concentrated with top-quartile performers, accelerating the shift toward concentration in the industry and intensifying pressure on mid-tier and underperforming managers facing accelerating redemptions.
The weakness translated into severe capital destruction and industry contraction. Investors withdrew over $130 billion from hedge funds during 2019, a striking vote of no confidence in active management and hedge fund strategy. The industry is now on track to record more fund closures than launches for the fifth consecutive year, a historic reversal for a sector once celebrated as a wealth-creation engine. According to available reports, many hedge funds were forced to shut down due to a combination of rising operational costs, persistent underperformance, and investor redemptions, with surviving funds often returning capital to investors or operating with severely reduced asset bases.
The underperformance challenge extends beyond 2019 alone. Historical analysis reveals a chronic lag: across the seven years when equity markets generated positive returns, hedge funds underperformed the S&P 500 index by approximately 2% annually on average. This structural underperformance contradicts the fundamental premise underlying hedge fund investing—that sophisticated managers would deliver downside protection through hedging strategies, accepting modest underperformance in rising markets in exchange for capital preservation during downturns. Instead, hedge funds have frequently failed to deliver either component of this promise.
Performance dispersion within the hedge fund universe remained pronounced, indicating that manager skill rather than broad industry trends dominated individual fund outcomes. Some managers reported gains exceeding 50% during 2019, while others posted significant losses, reflecting divergent strategy exposures and execution quality. This wide distribution suggests that investor capital increasingly concentrated with top-quartile performers, accelerating the shift toward concentration in the industry and intensifying pressure on mid-tier and underperforming managers facing accelerating redemptions.
Go deeper than the headline
Research every firm in this story, track the ones that matter and get the daily briefing — free for 7 days.