[ by Melanie Gretchen ]

Is it the economy or are hedge fund managers employing the wrong strategies?

Come hell or high water.  Over the past 12 months, most hedge funds failed to clear their respective performance hurdles, often referred to as high-water marks - according to fund tracker Hedge Fund Research.  That probably means that there will be no performance fees earned for the period by 57% of all hedge fund managers - i.e., they failed to "clear the bar." 

While the statistics are a marked improvement over Q4 of 2011, when just 13% of funds were at levels sufficient to generate performance fees – which was a worse performance record than achieved during the 2008 financial crisis.  However, all managers would rather be comparing themselves to the top quartiles, rather than the bottom ones.

Progress, But Not Perfect. So far this year, the average hedge fund is up just 2.29%, compared with losses of 8.87% last year, according to HFR’s hedge fund index.  Here's the score:

• JPMorgan’s Highbridge’s long-short equity fund: up 6.8%, following losses of 12.6% last year
• Fortress’ macro fund: up 7.4% following losses of 9% last year
• Landsdowne Global Financial fund: up 7.8%, after a whopping 20% drop last year

What that means: those that fail to hit their marks by the end of the year will forgo their usual fee of 20% of profits until clients have recovered from losses.  That doesn't mean money managers get nothing: last year, many hedge funds paid out of their so-called management fees, HFR found.  In addition to their potential profits, most money managers receive management fees often – about 2% of assets – regardless of performance.

C-I Takeway: Just make sure you work for a big hedge fund then the going gets tough: smaller firms are more vulnerable when it comes to cutting bonuses, losing employees and closing up shop.

"In times of stress, when you’re not collecting performance fees, the ability of small hedge funds to pay employees is much more limited.  The big get bigger and survive even in adverse circumstances." -- Anurag Bhardwaj, head of hedge-fund consulting for Barclays, which suffered a decrease in revenue from performance fees by 69% in 2011.

For further details, go to [NY Post, 9/27/12].