There hasn't been a period of time since 2000 when the death of hedge funds hasn't been spoken about as being imminent and widespread. Any type of pull back or market calamity is cited as the latest reason for their demise.
Just like any other profession based on performance if you don't perform you don't deserve to be in the business. If a wide receiver in the NFL suddenly starts catching only 30% of the balls thrown to him then he will no longer be employable in the NFL. It doesn't mean that the wide receiver position is dead.
Elegantly bringing me to my next point. The hedge fund industry has become overwrought with sophisticated salesman in possession of advanced degrees who neither have a passion for the business or the aptitude to be in it. Instead they are in possession of above-average levels of salesmanship and a network of wealthy individuals who become smitten.
Their strategy is one that relies on follow the leader in what has become a copycat profession in the midst of a culture that is obsessed with closet indexing. The only passion is for collecting fees without regard for developing real skills or taking well thought-out steps to improve performance.
Take for instance the most recent run of the herd at beaten down oil and gas stocks. In what is purely a reversion to the mean trade, hedge funds are playing a game of musical chairs with any energy stock they can get their hands on. There is nothing repeatable about the process of buying energy stocks either now or two months ago. In other words if you ask the average hedge fund manager that has bought into energy over the last couple months to repeat the process in another asset class at some point down the road it will be impossible to do so because there is no process behind it other than piling into momentum.
Until investors in hedge funds are able to differentiate real managers with a distinctive investment process from professional salesman that are only in possession of the gift of gab, the cycle of scorned investors and negative publicity will continue.
