Howard Fischer, wearing a white shirt and khakis, leans back into a window seat at a juice bar in Greenwich, Connecticut, sips a cold-brewed Mexican mocha and shares his angst.

“It’s miserable, miserable,” the 57-year-old manager of $1.1 billion Basso Capital Management says of hedge fund returns over the past few years. “If that’s the normal expectation, I don’t have a business.”

Fischer’s lament and ones like it are echoing through the industry. It’s an existential crisis for former masters of the universe who once prided themselves on their trading prowess. Now they’re questioning their wisdom and their ability to generate profits that made them among the richest in finance.

The $2.9 trillion industry has posted average annual returns of 2 percent over the past three years, well below those of most index funds, according to data compiled by Bloomberg. That meager performance and complaints about high fees from pension plans and other investors led to $51.5 billion being withdrawn from hedge funds in the first nine months of the year, the most since the financial crisis, data compiled by Hedge Fund Research Inc. show. About 530 funds were liquidated in the first half, on pace for the most shutdowns since 2008.


Warped Markets

Managers blame a wall of index-fund money and algorithmic trading for warping markets. They bemoan central bank near-zero-rate policies, political and economic decisions made overseas and government regulation for undermining their craft. Add to that global economic uncertainty and an onslaught of technology that’s changing the investing process. It’s enough to have the so-called best and brightest second-guessing themselves.

“Many investors seem to gradually be coming to a realization that what they think they know may no longer matter,” Jordi Visser, who runs investments at $1 billion hedge fund Weiss Multi-Strategy Advisers, wrote in a June paper. “It appears to be a feeling of being trapped in an investing world that no longer makes sense.”

Craig Effron, who co-founded $1.8 billion Scoggin Capital Management in the late 1980s, shares those profound doubts. Sinking into an oversize gray armchair in his office near Central Park, dressed in jeans and a striped T-shirt, the 57-year-old manager says the past few years have been the most perplexing of his career.

Algorithms and exchange-traded funds have exacerbated price movements and driven industry stocks in unison, undermining wagers on single companies, Effron says. And while he understood why subprime mortgages lost their value a decade ago, he can’t fathom what negative interest rates in Japan or Denmark mean. Last year his fund slumped 10 percent as what he thought were his firm’s best trade ideas turned out to be the worst and he found it hard to explain the losses. This year the fund is up 15 percent.

“There was a playbook based on logic that worked most of the time before 2008,” he says, twisting the cap off a bottle of peach-flavored Snapple. “But the game has changed and logical investors haven’t got the new playbook figured out yet.”

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