For more crisp and insightful business and economic news, subscribe to The Daily Upside newsletter. It's completely free and we guarantee you'll learn something new every day.

Hedge funds were for decades among the titans of Wall Street, now they're struggling to even match the market.

The latest data shows one of the financial industry's most storied — and in some quarters reviled — sectors is struggling to raise cash, after a year of getting pushed against the ropes by market volatility.

Ransacked by Redditors

Hedge funds — whose selling point is they devise complex stock picking strategies to maximize returns — have watched clients walk one by one out the door in recent years, drawn to the promise of higher gains from private equity and private debt funds (or also just plain old benchmark indexes). Last year from January to November — the latest period where figures are available — they gained a mere 8.7% on average, according to data firm HFR. That's good enough for a third straight year of gains, but brutal compared to the S&P 500 index's 24% return in the same time period.

They've also proven vulnerable to sharp volatility. Retail investors co-ordinating on Reddit's infamous WallStreetBets community last year succeeded at knocking billions off of some funds last year by targeting their short positions — major fund Melvin Capital famously needed a bailout to survive. Others were clobbered when Beijing cracked down on private education companies. That's made raising cash a lot harder:

  • Investors put $24 billion into hedge funds, a $4 trillion industry, from January to September 2021 according to HFR — compared to the $110 billion they've taken out in the last three years.
  • Some firms have even waved the white flag — Intrinsic Value Investors, a $1.3 billion firm, and hedge fund DSAM both told clients in recent months that they're returning their money (White Square Capital also shut down in the summer, tanked by Redditors).

Inflation Hurts: One of the biggest funds in the world, Rokos Capital lost 25% through the end of November after getting crushed on the wrong side of investors' bets that central banks would increase rates to curb inflation.