Two decades ago, hedge funds seemed omnipotent. Whenever there was a market shock or a cyclical turn in the economy, savvy traders such as George Soros or Julian Robertson jumped in — and often made a killing.
No longer. When turbulence hit global markets this summer, some of the best hedge fund gurus were hammered: the sector collectively lost $78bn in August. What is more striking is that this follows several years of below-par performance, in which many hedge funds have failed even to beat the US stock index.
Why? One reason is that hedge funds are operating in an increasingly crowded space. Another is that their neat computing models are being upended by the antics of (increasingly) capricious governments as they respond to crises with unconventional methods, such as quantitative easing.