The typical fee structure for a hedge fund is a 2% management fee and 20% of the profits. After reading this article in the Wall Street Journal, one gets the impression that some hedge fund investors are getting bilked.
By Jenny Strasburg And Susan Pulliam
Hedge funds are crowding into more of the same trades these days, amplifying market swings during crises and unnerving investors. Such trading has stoked market jitters in recent months and helped to diminish the impact of corporate fundamentals on stock-market movements. Droves of small investors have reacted by pulling money from the market, questioning its stability and whether fast-moving traders are distorting prices.
The pack behavior undermines the image of hedge-fund chiefs as savvy money managers who sniff out investment opportunities that others don’t see—thereby justifying the hefty fees they charge clients. It also suggests that hedge funds are having a harder time coming up with money-making ideas in rocky markets.
Powerful macroeconomic forces such as government economic stimulus have been moving markets the past year, making it difficult for stock-picking hedge funds. That might account, in part, for the increase in pack behavior, says Nicolas Bollen, a finance professor at Vanderbilt University. “When there are these extraordinary forces at work in the market, the hedge-fund business model may not make sense,” he says.
“The whole hedge-fund industry is a series of crowded trades,” says Mr. Lo.