Hedge fund manager David Einhorn has built a reputation on his ability to crater a company’s stock.
His prescient short calls such as Allied Capital and Lehman Brothers had been announced in previous years at the annual Sohn Investment Conference in New York.
And so, as he took the stage at the event after the US stock market closed on May 4, audience members were eagerly anticipating what would come next.
In a 15-minute presentation, he laid out why industrial company Caterpillar should trade at half its current value.
The next day, the stock opened lower, but was down just 1%.
After a decade in which hedge fund assets nearly doubled, there are several signs that the golden era for the $2.9trn (€2.54trn) industry may be on the wane, draining the influence of fund managers who once considered themselves masters of the universe.
Once able to command hefty fees by routinely beating the Street, hedge funds are now facing a storm of unsatisfied clients who are demanding either steep discounts or withdrawing their funds entirely, leaving some in the industry wondering whether the pain is just beginning.
The same day that Mr Einhorn spoke in New York, the chief investment officer for the California State Teachers Retirement System called the typical hedge fund fee model “broken”.
A few weeks earlier, the New York City Employee’s Retirement Fund announced that it was pulling out of hedges completely.
Mr Einhorn is a prime example of the industry’s troubles. Last year, his Greenlight Capital lost 20%, marking the fund’s first down year since the 2007-09 financial crisis and only its second-ever annual loss since its inception in 1996.
Greenlight investors have expressed their disappointment by pulling money, helping shrink assets to roughly $9bn, down some $3bn from only eight months ago.
Mr Einhorn, who declined to comment for this story, acknowledged the tough new environment when he wrote to investors in January “we have never had a year where so little went right”, and pledged the firm would “concentrate on trying to make better returns.”
In part, the industry is a victim of its own popularity.
With an estimated 10,046 global hedge funds, according to Hedge Fund Research, near the record high in 2014 — investors and analysts say that many managers are chasing the same ideas, driving spreads downward and lowering potential returns.
At the same time, extraordinarily low global interest rates are keeping a lid on returns from arbitrage strategies that attempt to exploit differences between global economic policies, for example.
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