American businessman Ray Dalio appeared to have the golden touch. For over four decades, he raked in double-digit returns with his hedge fund company Bridgewater Associates. With assets amounting to around $150 billion (€136 billion), Bridgewater is the world’s largest hedge fund.
In contrast to many rivals, Mr. Dalio is less interested in big, daring risks, preferring analytical detail work. He focuses on macroeconomic trends, invests in a number of markets and tries to spread the risk across multiple asset classes.
But recently the golden touch has deserted Mr. Dalio. Bridgewater’s flagship Pure Alpha fund lost around 12 percent in value by the end of June. The extra performance that the hedge fund was expected to deliver – a performance called “alpha” in industry jargon – seemingly turned into anything but that.
This downturn reportedly put the brakes on new recruitment of potential employees. Bridgewater has been cancelling interviews with prospects and cutting short advanced negotiations with prospective new employees, The New York Times reported. Bridgewater has 1,500 employees. The Connecticut-based company declined to comment.
The situation at the hedge-fund industry’s leader isn’t an isolated case.
According to research firm Evestment, the hedge-fund sector earned on average 1.9 percent in the first half of 2016, while the equity markets yielded 5.7 percent worldwide.
“Hedge funds are hiring less people than in past years,” said Adam Lesperance, a partner at executive recruiting firm Longridge Partners in New York. “Those who have been in the profession for two or three years and are looking around will probably tend to go to private equity firms. That offers more security.”
Many newly established hedge funds, in particular, have been unable to collect enough money and would have to close, added Andreas Halin of executive-search firm Globalmind.
In the past year, 979 hedge funds closed their doors, and there hasn’t been that many shutdowns since 2009.
“The employees come onto the market but in many cases fall into nothing,” Mr. Halin said.
The financial sector as a whole is downsizing, and banks in particular have been shedding jobs for years.
Among the spectacular fund closures was Orange Capital, which was co-managed by former Citi banker Daniel Lewis and which returned a billion dollars to its investors. Seminole Management also said goodbye to its investors and returned $400 million.
Fortress closed down its global flagship macro fund run by legendary manager Michael Novogratz last year. BlueCrest announced it would speculate only with its own capital. BlueCrest co-founder Mike Platt faced the consequences after the money the fund had been managing plummeted by 40 percent to just under $8 billion.
Things look much the same at Chesapeake Partners, which is run by Traci Lerner. In future, Ms. Lerner wants to manage only her own money.
Hedge funds are under pressure after the sector, worth around $3 trillion, had losses of over 3.5 percent last year. Resistance to high fees, which generally consist of a 2 percent management commission and profit-sharing of 20 percent, is spreading. The University of Maryland foundation, which is worth billions, has announced that it plans to determine which hedge funds produce returns that leave something to be desired.
Hedge funds bet on rising or falling prices in the stock markets, trends in currencies and commodities and price differences on the exchanges, and the funds try to make a profit in mergers and acquisitions.
As a rule, young people must work longer at hedge funds than, for example, investment companies or in investment banking before they are allowed to make their own decisions.
In recent years, Bridgewater hired “a huge amount of people,” Mr. Lesperance said.
But in 2014, for example, newcomers stayed with the company on average for less than a year.
“The competitive pressure is tremendous there,” he said.
Even so, headlines are overstating the crisis faced by hedge funds, Mr. Lesperance says.
“There are still a lot that are making good money,” he said.
But according to research firm Evestment, the sector earned on average 1.9 percent in the first half of 2016, while the equity markets yielded 5.7 percent worldwide.
Bridgewater Associates might face challenges, but the company and Mr. Dalio retain considerable clout. The fund managed to wrest financial advantages from the state of Connecticut last spring after Mr. Dalio threatened to move Bridgewater’s headquarters from Westport to New York. The deal included a loan of more than $17 million that doesn’t have to be repaid if Bridgewater creates 750 new jobs.
A large number of hedge funds are based in Connecticut, which is north of New York City, because taxes are lower there. The hedge funds and in some cases their managers, earn billions, which they don’t like to share with the U.S. Internal Revenue Service.
Frank Wiebe is a New York correspondent for Handelsblatt, covering finance policy. Robert Landgraf is Handelsblatt's chief correspondent for the financial markets. To contact the authors: [email protected], [email protected]