You want to know who moves the market? Hedge funds now control so much money that they can often drive the entire stock market up or down, especially when they are on the same side of the bull/bear divide. According to the latest numbers from researcher Eurekahedge, global hedge funds now control $2.3 Trillion in investable assets. Most of that money belongs to ultra-wealthy individuals and institutions like pension funds. And a fairly large chunk of the total is described as “hot money” which means it can move around quickly. Hot money creates instability in the market, and that’s not good for investors’ nerves.
Take a look at the growth of the hedge fund industry since 2000.
(Source: Eurekahedge)
If we look at the growth of assets in a different way, we can see that the market crash of 2008 struck a blow to the industry’s growth. But thanks to a sharp rebound in performance after the crisis ended in 2009, investors began to pour money back into hedge funds with a vengeance.
(Source: Eurekahedge)
Lastly, take a look at the performance of the hedge fund industry compared to the stock market as a whole. The time period is 1999 to 2014. As you can see, hedge funds have beaten the stock market averages consistently over this time frame.
What can we take away from this tremendous growth in the size and power of hedge funds? For me, it’s a cautionary tale. It means that we can expect more and bigger ups and downs in the market, because this “hot money” has become so large that it can push the stock market around without much effort. Remember that next time you see a big move in the market. Ask yourself whether you might have just witnessed the impact of the hedge fund freight train coming through town.