picked stocks for three decades. He spent the 1990s at Harvard University’s endowment, making winning bets on and against companies. Then he built a hedge fund, Highfields Capital Management, which made a mint in 2001 betting against Enron Corp.
Recent history hasn’t been as kind. After badly trailing the market in recent years, Mr. Jacobson told investors in his $12.1 billion fund a year ago he was giving them their money back.
“I wasn’t having fun,” he told a group of other hedge-fund titans the next month at a Miami dinner. “How about you guys?”
Hedge-fund managers once reigned over the investment industry. The best of them accumulated huge wealth. Investment funds angled to buy pieces of their business. Clients lined up for the privilege of investing with them. The biggest endowed the arts and education and put their names on buildings.
Today, clients have withdrawn money for three straight years from hedge funds that pick stocks, either betting for or against, according to research firm
That is the longest stretch of net outflows from such funds, once the growth engine of the industry, since HFR began tracking the data in 1990.
The reason isn’t hard to find: They’re no longer especially good at picking stocks.
Hedge funds use many strategies. Some make calls on the direction of interest rates or currencies. Some buy discounted bonds in a wager the companies that issued them will strengthen. So-called quant funds use computer models and predictive algorithms to sift vast reams of data and decide what to buy and sell.
At hedge funds where human stock pickers are in charge, managers dig into corporate filings, meet with companies’ managements and suppliers, parse data for insights on customer behavior, or bet on events such as mergers. Their trades are either long, wagering on a security to rise, or short, a bet it will fall.
Stock hedge funds outgunned the S&P 500’s total return, meaning with dividends included, by an average of more than 5 percentage points a year from 1990 through 2009, according to an analysis of HFR data that tracks equity funds using both fundamental and quantitative strategies.
From 2010, early in a record bull run, through this September, clients have been paying those funds to trail the S&P by nearly 9 points a year, on average.
Relative annual average performance of stock hedge funds compared to the total return of the S&P 500
-8.9 pct. pts.
-8.9 pct. pts.
-8.9 pct. pts.
“Investors are frustrated,” said
of Fund Evaluation Group, a consulting firm that provides advice on where to invest. “Clients expect them to underperform in a raging bull market, but not by a huge degree, for years on end.”
In the golden age of stock picking, hedge-fund pioneers such as
notched more than 20% gains in 1990, a year when the S&P 500 lost 3.1%. Among early hedge-fund managers was
a former mutual-fund star at Fidelity Investments.
Mr. Vinik closed his hedge fund in 2013 but said in January 2019 he would relaunch it and hoped to raise $3 billion in two months. He raised $465 million.
“What I learned after probably 75 meetings is the hedge-fund industry of 2019 is very different than the hedge-fund industry when I started in 1996, and it’s even very different from the hedge-fund industry when I closed in 2013,” Mr. Vinik said.