A decade ago, when the bankruptcy of Lehman Brothers sent the global financial system into a tailspin and triggered what would become known as the Great Recession, a few creative risk takers—against all odds—became billionaires.
In a financial universe that had just come undone, they appeared to be the brightest stars. These men—and they were almost all men—had foreseen the dangers of the toxic financial instruments most people couldn’t understand. They predicted the fall of Lehman. They seemed to be able to make money—massive sums of money—when everyone else was losing it.
Their riches made hedge funders glamorous. They bought Picassos and Matisses and had museum wings named after themselves. Page Six gossiped about their multimillion-dollar divorces. Everyone lusted after a piece of the wealth, including wealthy individuals, university endowments, sovereign wealth funds and public pension funds.
But almost as soon as they became wildly popular, hedge funds quit making money–at least not the massive sums of the past and not more than one could make by simply investing in an index fund.
In 2018, hedge funds turned in another underwhelming performance. Ever since 2009, they’ve failed to beat the market overall. What was once the most celebrated instrument in the financial world is simply not working. Yet hedge funds, purported to be the most rational of economic actors, still manage $3.2 trillion. What the hell happened to hedge funds—and why do so many investors seem determined to go down with the ship?
My Worth essay tries to answer these questions.