Ken Griffin. David Tepper. George Soros. Ray Dalio. Steve Cohen. Each of these men are hedge fund managers with net worths above $1 billion. For the last decade or so, if you wanted to become a self-made billionaire, you went into one of two industries: tech or finance. Tech is still on fire, as evidenced by Snap Inc.'s IPO, but the hedge fund billionaire is on the decline.
Over the past couple of years, overall returns of hedge funds have stalled. Investors have become more and more concerned about high management fees and other idiosyncrasies of the hedge fund world. As a result, the number of hedge funds in existence has declined. As a further result, so have the fees the managers charge. The hedge fund billionaire is in a fight for his figurative life.
In 2006, there were 13 billionaires on the Forbes list who had made their vast fortunes by overseeing hedge funds. Those 13 people controlled around $34 billion.
Fast forward nine years to 2015, and the number of hedge fund managers on the annual list of the 400 wealthiest people had grown to 32. Those 32 men handled $169 billion.
But in 2016, things changed for our favorite billionaire hedge fund managers. Four of them fell off the list of the richest Americans. Last year, 28 hedge fund managers made the list. They controlled a combined $162.5 billion.
It's a slight downward trend but it is significant. The hedge fund billionaire is nearly an exclusively American phenomenon. The only other place that mints these billionaires is London. Of course in the wake of Brexit, that could change as well.
The drop in hedge fund managers on the list of the wealthiest Americans mirrors a drop in the number of hedge funds currently in operation.
In 2005, 2,073 new hedge funds were opened. Today, many of those are closing. During the first nine months of 2016, 782 hedge funds shut their doors. That is equal in percentage to the number of funds that shut down during the 2008 financial crisis.
The number of hedge funds peaked in 2014 with 10,142. Today, there are 9,925 in operation.
Again, this decline is slight, but significant. The rise of financial sector billionaires is cyclical. They come and they go.
Even with less hedge funds, the amount of money they control has stayed high due to the recent performance of the stock market.
Also working against the long term earnings capability of the current crop of hedge fund billionaires is the fees they charge. Typically, hedge funds charge their investors 2% in fees each year as well as 20% of the profits earned from their investments. If this sounds like a get rich quick scheme its because, it basically is one.
Now, consider index funds where investors pay a much smaller management fee – typically 0.10%. With hedge funds currently trailing the broader index funds, investors are weary of giving up such a high percentage of their earnings. Big name pension funds like the California Public Employees' Retirement System have pulled out of hedge fund investing altogether. New York City's pension fund has been weighing whether or not to liquidate their $1.5 billion hedge fund portfolio.
Of course, even with the decline of hedge funds, the managers remain very wealthy and are likely to remain so. Certainly, bad investments and expensive divorces can make a dent in their fortunes. But never fear, the wealth of hedge fund managers is pretty liquid. They are in a cash business, so unlike other billionaires with wealth tied up in assets they cannot liquidate quite so quickly, hedge fund billionaires can get to their wealth as simply as writing a check.
In summary, hedge funds are on a downtrend and this is expected to continue. Managers will have to adapt to stay in control or continue to see funds close and managers drop off the list of wealthiest Americans. And, given that this sector has had some pricey and volatile divorces lately, it would be a good idea for them to execute prenuptial agreements in the future.