Hedge fund performance has declined precipitously since the 1990s as assets under management have exploded. The managers are not solely to blame.
While alpha has withered, large institutional investors have piled into large hedge fund managers that are perceived to be safe — an industry transformation beautifully summarized by Blackstone Group:
The original hedge fund clients, wealthy people, were initially attracted to star managers who were able to deliver outstanding performance during the 1980s and 1990s when the Standard Poor’s 500 was compounding at 15 percent or better annually. When the technology bubble burst in 2000, the focus of the industry began to change. Suddenly there was a greater emphasis on protecting capital in difficult markets rather than maximizing profits in good times. Management fees also began to rise and hedge funds changed character. The early funds were organized to produce exceptional performance and they were willing to take higher-than-normal risk to achieve their objectives. The market was rising almost every year, so the risk insensitivity was not critical back then.
All that changed after 2000. With higher fees, hedge funds became real businesses and maintaining the asset base became an important objective. As a result, hedge funds became obsessive about risk control and their new institutional clients encouraged this attitude. These investors were willing to experience underperformance when the market was doing well in exchange for asset protection in declining periods. Volatility became a key area of client focus and monthly drawdowns were carefully scrutinized. Hedge fund managers were willing to give up performance points on the upside to achieve low volatility.
More here – Institutional Investor
PS: I think what they are trying to say is that the original hedge funds got lucky in terms of the markets they were born into and now that running a hedge fund is a business that requires some skill in terms of risk management ad removing your ego from the equation they have floundered. It could also be that the new arrivals simply dont know what they are doing.