RIP hedge fund superstars

They used to rule the stock market like gods. Now their days of domination are over.

I can tell you how hedge-fund land used to operate because I was there.

A few times a year in locations around the world — Las Vegas, New York City, Singapore — thousands of money managers and their juniors would gather in an over-air-conditioned ballroom, make polite conversation over stale coffee, and sit through boring lectures about portfolio construction or talent acquisition or some no-name undervalued asset. Then a superstar hedge-fund manager would take the stage, and the vibe would shift. It was time to pay close attention, to take in what the congregation believed to be the insights of a superior mind observing the market.

At some conferences, these supposed masters of the universe would give detailed presentations about a woefully mispriced security. At others, they would wax philosophical about their investment style, dropping breadcrumbs about where their money was flowing. No matter the topic, the room would be rapt. When company or asset names were dropped, the market would follow, moving up or down to whatever tune the superstar played. This was the ultimate power of a hedge-fund king. They played music, and the market danced.

Then all that stopped. It’s hard to pinpoint when this changed or why the hedge-fund megastar is in decline. Maybe it was the pandemic, when meeting in over-air-conditioned ballrooms became an absolute no-no. Perhaps it was the rise of other glamourous investment vehicles — private equity, private credit, and venture capital slowly eating up the institutional money that used to be handed to hedge funds helmed by a single all-powerful trader. Maybe there was a psychological shift in the managers themselves — like when David Tepper, the founder of Appaloosa Management and a regular on the list of best-paid hedge-fund managers in the world, bought the Carolina Panthers and left Wall Street to go play with his new toy. It’s all hard to say.

What is clear is that hedge funds run by an individual star, by one prodigious mind, are not raising the massive money they used to. Clients who once were proud to hand their money to a specific person are pushing back; they want to pay lower fees and see less-volatile returns. The funds that have survived rely on a stable of faceless traders testing out different ideas, brokering transactions, and harvesting the returns for the collective. Quant strategies — which are built on algorithmic trading — have also become more popular with the ultrawealthy. More robots, fewer people, lower overhead.

A decade ago, this kind of open rebellion from those blessed enough to invest with the best would’ve been unthinkable. Back then, Anthony Scaramucci could hire Lenny Kravitz to play for a ballroom full of guys with lanyards at the Bellagio because people were willing to shell out thousands just to get a peek into what big-name managers were doing. That party is over. Hedge-fund land, which was once a collective of boisterous shit-talkers from around the world flinging ideas at one another, has gone strangely quiet. What you hear now is the click-clack of quant nerds building a new algo, a few blasé words from a legendary manager who has closed up shop in frustration, and rumors of one nondescript portfolio manager being poached from one huge, flavorless fund to another. I would never say Wall Street was a fun place exactly, but this state of affairs is — frankly — boring.

Catch a falling star

The signs of our new, staid norm are everywhere. The most glaring is the inability of hedge-fund land to mint new stars. A new generation of superstars shows there’s still demand for their minds as a financial product. Even more-seasoned names who are raising their shingles can’t launch with the same panache as before. Bobby Jain, the former co-chief investment officer of Millennium Management, announced in 2023 that he planned to raise $8 billion to $10 billion to set up his own shop. It would have been a historic sum for a hedge fund, but he has what was once considered the perfect pedigree: 20 years at Credit Suisse in various executive investment positions, then a stint as co-chief investment officer at Millennium Management. When he finally opened his firm, Jain Global, in late June, he did so with about half of what he expected. And Jain may be the high-water mark in a bleak time; Goldman Sachs released a report in February based on 358 interviews with hedge-fund clients that found that investments in hedge-fund launches fell to new lows in 2023. Denise Shull, a performance coach with a Rolodex full of hedge-fund clients, told me that in the first half of the year, money managers told her they could “not buy an investor meeting this year.”

Even the old lions are struggling to roar in the same way. Take activist hedge funds, which buy up a percentage of a company’s stock (or an asset) and then use their weight to push for operational changes. It used to be that when an activist investor with chops demanded those changes, the company’s CEO would sit up and listen. Or there would be a fun, splashy war between the hedge fund and the C-suite. Nowadays, that kind of activity is met with a shrug. Saba Capital’s Boaz Weinstein could not budge BlackRock in his quest to change the way it managed closed-end funds. Disney basically rolled its eyes when Nelson Peltz launched a monthslong campaign to get the company to shake up its board and ditch CEO Bob Iger. Even Paul Singer’s Elliott Management — a hedge fund that impounded an Argentine naval vessel in 2012 because the country’s government owed it money — has failed in its efforts to reshape Salesforce. The board does not seem concerned about Elliott, and other shareholders are not jumping on Elliott’s bandwagon. Or, as one surviving fund manager, ValueWorks founder Charles Lemonides, put it to me simply: “There’s no posse behind them.” The vultures can circle all they want, but no one fears them anymore.

It’s gotten so bad that even the people who have entrusted their money to hedge-fund land are pushing back. In May, a group of clients including sovereign wealth funds, pension funds, and endowments representing about $200 billion in invested capital published an open letter to the hedge-fund industry. They said that in recent years a misalignment between the hedge-fund world’s fee structure and its returns (some of them gasp “skill-less”) had become evident — and so, in an effort to realign managers with their clients, cash hurdles in incentive fees must be implemented. “The long-term health of the industry,” they wrote, depends on it.

So last season

The waning power of the hedge-fund personality comes down to two big factors. The first is performance. One would think that a stock market that has charged up relentlessly would be good news for the hedge-fund community. Instead, it has had the opposite effect. Hedge funds rely on outperforming the market when times are hard and it’s easier to find pockets of outperformance and exploit them. When the market is rewarding people just for parking their money in it, it’s harder to beat — to generate alpha, returns in excess of what the market provides. If the waters are not choppy, anyone can sail.

The performance issues also reinforce a vicious cycle. There’s fashion in finance. Investing in hedge funds used to be the mark of a sophisticated investor. Meir Statman, a behavioral economist at Santa Clara University who wrote the book “A Wealth of Well-Being: A Holistic Approach to Behavioral Finance,” told me that he was at a conference years ago discussing mutual funds with an attendee when the man interrupted: “I’m into hedge funds.” It was a status symbol, Statman said, a way for him to “tell you that I’m a wealthy man without saying I’m a wealthy man, which sounds crass.”

That’s shifted. Hedge funds, Statman said, “have been losing power for a while,” while other kinds of investing, like private equity and private credit, have taken on the air of sophistication. This has had a psychological effect on clients, not unlike the chill Paris Hilton must feel when she looks at the Marc Jacobs bags she wore back in the early 2000s.

“When you think about buying a car, you care about utilitarian features, but you also care about expression and emotional benefits, the style: ‘What does it say about me?'” tatman told me. It’s the same with being a big-money client, and what you want your investment to say is that you know how to get the best.

Of course, hedge funds are having a hard time coming up with a crew because the clients have changed too. In decades past, clients were mostly HNWIs: high-net-worth individuals. Nowadays the biggest money runners are institutions, and institutions are more exacting. One legendary but shy fund manager told me that these institutions are more interested in steady returns, and the wild swings in performance that hedge funds offer simply give them heartburn. “They can sleep better at night,” the person said. “The economy can turn bad, the stock market can crash, and they’re not going to share losses.”

Sebastian Mallaby, the author of “More Money Than God: Hedge Funds and the Making of the New Elite,” told me that institutions are also less willing to be enchanted by the personal magnetism of a founder like Julian Robertson, the founder of the legendary fund Tiger Management.

“In the old days, Julian Robertson would hold a party for HNWIs and have some kind of wacky show for them at the Met, and they’d say ‘Julian, what a guy’ and leave him alone for a year,” Mallaby said. “That’s gone away because individual investors aren’t as important as institutional investors, who have to show they’ve been careful where they put the money.”

And it’s not just about where hedge funds put money anymore — it’s about how. To prove that they’re cautious with cash and avoid the wrath of regulators, hedge funds must stay on top of disclosure requirements, employ the appropriate compliance officers, and pay the right lawyers. This has gotten more complex, tedious, and expensive over the years. It is the kind of drudgery that is the parlance not of rockstar traders but of CEOs. So it is unsurprising that the most successful funds these days are multi-strategy firms helmed by a business operator. Firms like that are structured to handle eye-watering overhead costs, staff dozens of anonymous portfolio managers, and are managed by staid executives whose idea of a joy ride in their Ferrari is taking it through the McDonald’s drive-thru.

A beautiful washout

Now, with all this said, I am by no means asking you to feel sorry for these (maybe) former so-called masters of the universe. They will be fine even if they have to sell their yachts. What we are observing here is simply that the market can be unforgiving. This is a bull market whose length and breadth have made a fool of professionals and made professional fools. “In bull markets, people get run over,” Lemonides said.

Of course, no one knows how long the market will keep going up or how long swashbuckling hedge funders will be out of favor. We know only that nothing lasts forever — not bull markets, not bear markets, not investment strategies.

“At the end of the 1960s, the bubble burst, and everyone thought, ‘That’s the end of hedge funds,'” Mallaby said. “Certain styles have come to an end because they have become saturated. The great traders are the ones who morph what they do every five years.” If you do not adjust to the market, the market adjusts you. All of a sudden, everything that worked doesn’t work anymore. Then Wall Street demands new names and new faces.

For now, we live in a world dominated by bizarro retail traders and wonky quants. Keith Gill, aka “Roaring Kitty,” became a folk hero to social-media-pilled day traders and an obsession of the financial media by looking buffoonish and talking up GameStop’s withering stock on the internet in 2021. It crashed, just like the hedge-fund guys said it would. But the episode — and Gill’s return this May — seemed to show that the ability to move a stock had transformed from a magic power into a magic trick.

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“I’m not inclined to take a side between traders,” Mallaby said, “but when David Einhorn” — the founder of Greenlight Capital — “was banking on the classic fights that he fought, I remember watching some of his arguments as to why such and such was overpriced. And they were arguments; they were based on forensic accounting.” He added, “I do have more respect for that than someone who puts on wacky sunglasses, but it is fair game, and I’m not inclined to get moralistic about it.”

For now, as the old methods of making money in the market seem to be floundering, everyone is looking for the new, the different, the smarter. Even the old pipelines of talent seem passé.

“Don’t give me another Harvard or Princeton grad saying, ‘Look at my analysis,'” Andrew Left, the founder of the activist short-selling fund Citron Research, told me. “It’s like, ‘Fuck off, bro.'”

No one knows where the market is going, but we know that it will change. Maybe dramatically, maybe less so. Perhaps what we are witnessing right now in hedge-fund land is less an extinction and more a pause as the industry waits for the market to reveal a more familiar new normal. That has happened before, but heads tend to roll rather violently along the way.

Months ago, I asked that shy legendary hedge-fund manager to name one — just one — rising star in their industry. They could not. But they were sure that person was out there. Somewhere. Right?