Although hedge fund returns are actually looking up (at least in comparison with the most recent years), firms and their management are nonetheless facing a growing client revolt. According to reporting by Bloomberg, hedge fund managers have continued to earn astronomical salaries and bonuses, while their funds have failed to bring in the big results that they are reputed to earn. 2016 saw a growing number of institutional investors and other major clients start to divest from hedge funds as a result of this disappointment, and some analysts expect the trend to continue into 2017 unless something significant changes in the hedge fund world.

Pension Funds and Endowments Pave the Way

The trend toward hedge fund investor withdrawals can be traced back in many cases to large public pension funds and endowments. These clients, which wield huge amounts of money and answer to large oversight groups, were among the first to move away from hedge fund investments earlier last year. Retirement funds for public employees in Kentucky, New York, New Jersey, and Rhode Island all made headlines when they removed some or all of their investments from hedge funds in 2016. Universities in Maryland and elsewhere followed suit, as did major insurers including MetLife, Inc.

Firms Shift in Response

Hedge funds, feeling the pressure of declining asset pools and upset investor bases, began to shift their strategies. Firms that were in the worst positions reluctantly changed their longstanding "2 and 20" fees, while those in the worst positions ended up going out of business. Richard Perry of Perry Capital was among the most prominent hedge fund managers forced to shut down portions of his fund's operations in response to dwindling assets and interest.

Fall Has Been in the Works Since 2008

Some analysts believe that the troubles facing hedge funds have been brewing since 2008. By the end of the financial crisis, hedge funds were generating an average annual return only 40% of what it had been. While optimists expected that these trends would reverse, in many cases the low numbers have continued for nearly a decade. Investors, losing patience, have moved away from their hedge fund investments.

As of now, clients have only withdrawn a total of about 2% of hedge fund assets, across the industry. However, Tony James, the president of Blackstone Group, has estimated the industry might shrink by 25% in the year to come, and hedge fund closure rates are climbing to record high levels. Hedge fund managers will continue to work toward new models of investment that bring better return levels, innovative fee structures and plans that accommodate client frustrations, and the ever-illusive edge over a crowded field of peer firms and rivals.

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