The Classic Hedge Fund Is Stuck

Equity managers haven’t provided the kind of bear market buffer clients had hoped for

- Pat Regnier

Even in the high-pressure, high-pay world of hedge funds, the “long-short” stockpicker is supposed to be somebody special. The style, pioneered seven decades ago by Alfred Winslow Jones, gave hedge funds their name. In addition to betting on their favorite stocks going up (or being long, in Wall Street’s argot), they wager on other stocks falling (selling short) and use leverage to juice their gains. The idea is that an investor with a true skill at spotting both good and bad companies will be hedged against broader market declines, as long as their shorts fall more than the longs do. And that clients would be willing to pay enormous fees— traditionally 2% of assets per year, plus 20% of profits—for that kind of magic touch.

But the performance of these would-be wizards has slipped, just when their clients need them to soften the blow from the most ferocious market selloff in more than a decade. Equity hedge funds are down 15% this year, according to data compiled by Bloomberg. Chase Coleman’s Tiger Global is in the worst shape among large players, losing almost 52%. Dan Sundheim’s D1 Capital Partners has slumped 28%, and Ross Turner’s Pelham Capital is down 32.5%. Lone Pine Capital, run by Steve Mandel, has seen firmwide assets slump 42%, to $16.7 billion.