And what happened in 2009?

The toxic mix of crummy performance and high fees are having some impact. And it’s big money: The hedge fund industry has over $3 trillion under management. And some of this money is getting antsy.

In July, hedge funds experienced net outflows of an estimated $25.2 billion, the largest monthly net redemption since February 2009 ($28.2 billion), according to an eVestment report cited by Bloomberg. In June, hedge funds got hit with net outflows of $23.5 billion. In March, redemptions had hit $7 billion, and in January $20 billion. With some inflows in the remaining three months, total outflows for 2016 so far amount to $55.9 billion.

“Unless these pressures recede, 2016 will be the third year on record with net annual outflows,” according to eVestment’s report. The other two years were 2008 and 2009.

During the first seven month, when the S&P 500 rose 7.6%, hedge funds industry-wide had gains of only 1.2%, according to Bloomberg. The 10 funds with the largest redemptions lost on average 4.1%.

So how bad is this compared to 2008 and 2009?

In 2008, according to the Credit Suisse/Tremont’s annual summary (released in early 2009), an estimated 29%, or $582 billion, of the industry’s assets evaporated, the majority due to plunging prices of financial assets: the Hedge Fund Broad Index was down 19.1% in 2008, the first double digit loss in the history of the index going back to 1994.

But $149 billion disappeared due to investor redemptions. It was also the first year of net asset outflow in the history of the index. It brought total assets under management down to $1.5 trillion. At the time, the words “redemptions” and “suspensions” kept cropping up even on CNBC.

But not every hedge fund got clocked: 106 funds in the index made money, while 390 funds in the index lost money. The best-performing fund made 93%, while the worst performing fund lost 100%.

Among the categories, the index of Equity Market Neutral Funds was the biggest loser, down 40.3%. The index of Dedicated Short Funds was the biggest gainer, up 14.9%, its best fund producing a gain of 68% and its worst fund a loss of 49%. If you can’t make money with a dedicated short fund during a Financial Crisis, when can you?

The Hedge Index (emphasis added):

The majority of losses occurred in September and October as hedge funds registered two of the worst months of performance in the history of the Broad Index.

However, despite significant losses, hedge funds fared better than broad equity indices overall by limiting drawdowns and maintaining considerably less volatility.

The report pointed out that during the worst moments in 2008, the hedge fund Broad Index was down 19.5% while the MSCI World Index was down 44% and the Barclays Global Aggregate Bond Index was down 10%. Back then, the hedge fund industry could still beat the market!

In 2009, the Fed stepped in with bank bailout programs, corporate bailout programs, QE, zero-interest-rate policy, nearly free loans to the well-connected with which to buy assets in order to drive up asset prices…. The Broad Index booked gains of 18.6%. The Hedge Index annual summary in early 2010 gloated:

2009 marks the best annual hedge fund performance in a decade, as measured by the Credit Suisse/Tremont Hedge Fund Index, and the greatest performance rebound since inception of the Index in 1994.

It was the year when Wall Street bonuses hit an all-time record, even as the entire financial sector, along with the biggest corporations, was getting bailed out by the Fed (and to a much smaller extent by the taxpayer via TARP).

By the fourth quarter of 2009, word got around, and investors started pouring money back into hedge funds. But for the year, net redemptions still amounted to $74 billion.

If 2016 redemptions – currently at $55.9 billion – get worse, they might well pass the $74 billion of redemptions in 2009. And then 2016 would go down as the second worst year for hedge funds in history.

With $3 trillion in assets under management, a whole generation of hedge fund traders has seen nothing but a bull market that has been engineered by the Fed to create enormous asset-price bubbles for the benefit of those holding the most assets.

Since March 2009, there has been one rule to make money: buy everything. Many hedge funds just chase stocks higher and then get caught with their pants down when things turn sour. Over the last two years, many of the formerly easy and obvious bets imploded, including energy. And just chasing after darling stocks, blindly following each other with huge bets into Valeant or even Apple, has caused some big losses despite record high overall market valuations.

Clients, including big pension funds, facing a toxic mix of crummy hedge-fund performance in asset-bubble nirvana and fees often amounting to 2% of assets and 20% of profits, are having second thoughts.

Unperturbed by reality, stocks have continued to march higher, causing the head of credit strategy at Citigroup to lament so eloquently, “Everything feels distorted and unnatural.” Read…  “Mother of all Shorts” when Stocks Cave to Reality?

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