Hedge Fund Billionaires Wealth Changes

In the annals of the immensely wealthy, the hedge fund manager is a relatively new entry. It has been only about a decade since significant numbers of hedge fund managers, including Kenneth C. Griffin of Citadel, Paul Tudor Jones of Tudor Investment Corporation and Steven A. Cohen of Point72 Asset Management, began appearing on billionaire rankings.

Hedge fund managers quickly expanded their numbers on these lists. By 2015, they accounted for roughly 8 percent of the nation’s 400 wealthiest people, according to Forbes, which compiles that definitive list each year.

But the bloom may be coming off the hedge fund rose. In the past couple of years, as overall returns have lagged broad indexes, investors have grown increasingly concerned about exorbitant management fees, excessive secrecy and illiquidity in the arrangements. The result: The number of hedge funds is declining, and so are the fees managers charge.

Given this landscape, some wealth watchers are wondering: Has the hedge fund billionaires’ moment passed?
For now, anyway, the answers appears to be yes.

“We have seen a decline begin,” said Nathan Vardi, a senior editor at Forbes who specializes in hedge funds and billionaires. “I anticipate a further reduction, but it’s going to be slow.”

As evidence, Mr. Vardi pointed to the history of hedge fund managers who have appeared on the Forbes 400 list of wealthiest Americans. In 2006, there were 13 billionaires on the roster whose wealth was generated by their oversight of hedge funds. At the time, those individuals controlled an estimated $34.2 billion in wealth, Forbes said.

By 2015 the number of hedge fund billionaires on the list had more than doubled, to 32. Together those men (and yes, they are all men) controlled $169 billion in wealth.

But last year, the winds changed. Four managers fell off the list of the 400 richest Americans: William A. Ackman of Pershing Square Capital Management; David Einhorn of Greenlight Capital; Marc Lasry of Avenue Capital Group and owner of the Milwaukee Bucks; and Nelson Peltz, of Trian Fund Management. All are still billionaires, according to the Forbes estimates, but they are no longer among the 400 wealthiest Americans.

With those hedge funders departing, 28 billionaire managers remained on the list in 2016. Even though they were fewer in number, they still controlled an enormous amount of wealth: $162.5 billion.

It’s also worth noting that the hedge fund billionaire is an almost uniquely American species. Mr. Vardi said that Forbes had found no such billionaires in Asia, for example. The only other place where they flourish is in London, and that may change if Europe’s financial center shifts away from England after it voted last year to leave the European Union.

Not surprisingly, the decline in hedge fund managers among the richest Americans parallels a drop in the number of hedge funds operating. Back in 2005, for example, 2,073 new hedge funds opened their doors.

Now, many of these funds are closing. According to the research firm HFR, during the first three quarters of 2016, hedge fund liquidations totaled 782, on track for the highest number since the 2008 financial crisis. The number of new hedge funds was also down in the period.

All told, the number of hedge funds peaked in 2014 at 10,142. Today, the figure stands at 9,925, HFR said.

“By and large, this is a group that comes and goes,” said John C. Bogle, founder of the Vanguard Group and creator of the first stock index fund. “These are brilliant men and women. They’re over my head in depth of knowledge, but on average, they are going to all be average.” In other words, these managers cannot beat the market forever, and their performance will eventually revert to the mean.

Even as the number of hedge funds has fallen, the assets they have under management have stayed aloft. This is largely because of the recent run-up in stock prices. Hedge fund assets approached $3 trillion in the third quarter of 2016, according to HFR, up from around $1.5 trillion in 2006.

Given the trillions of dollars under management, it’s easy to see how the business could create such riches among its overseers. Indeed, charging investors 2 percent in management fees every year and 20 percent of the profits earned, hedge fund managers have one of the better get-rich-quick schemes ever devised on Wall Street.

The industry’s fee structure, for example, has taken a hit. The overall hedge fund management fee averaged 1.49 percent in the third quarter of 2016, down from 1.58 percent in 2010, HFR reported.

And the average incentive fee — that’s the amount the managers receive when they do well — stood at 17.5 percent last year, down from 19.3 percent in 2008.

Of course, even the hedge fund managers who are not among America’s 400 wealthiest people are still considered very rich. And they will likely remain so, unless they invest their money unwisely or go through an expensive divorce. Late last year, Mr. Ackman, for example, announced that he and Karen Ann Herskovitz, his wife of almost 23 years, were divorcing. News reports have noted that the Ackmans did not have a prenuptial agreement. His position as a billionaire, with an estimated $1.6 billion in wealth, may suffer as a result of the split.

Hedge fund managers are different from other rich people in this way: Theirs is extremely liquid wealth. Other billionaires’ holdings are often locked up in assets that cannot be sold as easily, such as real estate or company shares. Because hedge fund managers are essentially in a cash business, these managers are able to buy sports teams and other high-priced toys by writing a check.

Still, in Mr. Vardi’s view, it is unusual that hedge fund managers have become such a force among the nation’s wealthiest.

“I’m not taking anything away from them,” he said. “They do a lot of wonderful things and give a lot of money to charity. But 8 percent of the 400 wealthiest people in America is a big number for a group that arguably doesn’t contribute any economic activity.”

Read More: NYTimes

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