Once brilliant hedge fund managers starting to lose some sparkle

Assessing the health of the hedge fund industry is a complicated process. Frankly, it’s a confusing one. They had a rough year in 2013, getting trounced by cheap index funds, but most customers seemed to understand. Last year was a bull market and a correction was in order. Trillions more in assets were pumped into hedge funds despite the relatively poor performance.

But now, in month two of what many see as a market correction, several hedge funds are still struggling, particularly macro funds that just can’t seem to guess right. The Financial Times on Tuesday reported on a “brutal” October for the hedge fund industry, with Moore Capital, Tudor Investments and Fortress taking it on the chin in particular.

Accompanying that report is a similar one from Financial News, referring to financial turmoil in the markets as a “bloodbath” for hedge funds like Jana Partners and Discovery Capital Management. But unlike last year, institutional investors are no longer sitting on their hands.

Two of the largest pension funds in the U.K. just announced plans to limit their exposure to hedge funds. This comes just a month after CalPERS, the largest pension fund in the U.S., announced it would pull all of its investments from the industry. Large fees and underperformance have finally taken their toll. Somewhat ironically, the best performing hedge fund this year – family office SAC Capital – isn’t even taking fees.

All the scurrying has inspired several studies that look at the art of money management. Many have found that active management, over the long haul, loses out to patient investing. Another looked at thousands of mutual funds and found that only two ranked in the 20% for five straight years. In fact, the top 10% had a better chance of ranking toward the bottom the next year than they did staying near the top.

And now a study on the personal financial habits of money managers has surfaced. Researchers looked at 84 mutual-fund managers in Sweden, studying their fund stock portfolios, real-estate ownership, total wealth, and personality, according to The Atlantic.

Compared to people of similar age, income, and education background, money managers held no advantage whatsoever when it came to personal investments. In fact, the only real difference was that money managers traded too much and stubbornly held on to sinking stocks for too long.

Hedge fund and other money managers are undoubtedly smart people who will again have their day in the sun. But their street cred has certainly taken a hit this past year.