LONDON Generating strong returns is getting so tough for hedge fund managers, supposedly the high-earning masters of any market, that some are shutting up shop and more look poised to follow.
Years of choppy markets whipsawed by political risk have crippled performance and left many firms with little in the way of income earned by hefty fees.
Now, with an investor base increasingly ready to pull out, several are calling it quits.
Edoma Partners, one of the most talked about hedge fund launches since the financial crisis, said on Thursday it was closing just two years after it started, hit by poor performance and a flurry of investor redemptions.
Pierre Henri-Flamand, the ex-Goldman Sachs trader turned founder, blamed "unprecedented market conditions".
Other, more veteran managers, have also decided to exit.
Greg Coffey, one of the industry's best known figures, decided to retire early and liquidate one of his funds at Moore Capital, sources said earlier this month.
That followed Driss Ben-Brahim's decision to retire from GLG, the hedge fund he joined in 2008 and now owned by Man Group (EMG.L).
"It's been too long that hedge funds haven't delivered what they promised," said one investor, asking not to be named.
The average hedge fund has made its clients 4.86 percent this year, data from industry tracker Hedge Fund Research shows, far below the 12 or so percent investors would have got if they bought a fund tracking the S&P 500.
As many as 73 Asia-focused hedge funds shut down this year to end-September, although Europe has seen fewer closures.
Hedge funds market themselves for an ability to protect their clients' cash against market falls, and to make money in all trading environments.
Yet over the past three years, which includes several major equity market sell-offs, the average fund is up less than 4 percent while the S&P 500 is more than 30 percent ahead.
And without returns, managers do not get the lucrative performance fees - often a 20 percent cut - they crave.
"Maybe there is some fatigue at some levels. A number of classically driven fundamental managers have been frustrated by macro dominated markets for several years...," Fred Ingham, Head of International Hedge Fund Investments at Neuberger Berman, said, although he added that there were positive signs this may now be changing.
Hedge funds use management fees, an annual charge set at 1.5 or 2 percent of assets, to pay for salaries, rent in the upmarket districts of New York or London and their trading platforms.
If assets shrink, that business model can quickly come into question.
"The space is under pressure. If you are down 7 percent over two years, without a strong financial backing, it will be hard to hire and to make returns," Olivier Kintgen, chief investment officer at Europanel Research and Alternative Asset Management, said.
In an environment of rock-bottom rates, the hedge fund fee structure can also look outdated. Handing the manager 20 percent of double-digit gains is one thing, but losing a fifth of 4 or 5 percent made this year is harder to stomach.
According to hedge fund administrator SS&C GlobeOp's forward redemption indicator, client demands to pull money out of hedge funds rose to their highest level this year in September.
The monthly snapshot of clients giving notice to withdraw their cash as a percentage of SS&C GlobeOp's assets under administration measured 3.76 percent in September, up from 3.11 percent a year ago.
However, this is far below the all-time high in late 2008, when the GlobeOp Forward Redemption Indicator touched 19.27 percent.
Investors stress that with some managers still performing well, they are more likely to reallocate money within the industry to rivals rather that withdraw completely.
Others say that despite the poor performance and falling fees, for many hedge fund traders there is no option but to try and eke out better returns.
"I think a lot of managers will try and hang on. What's the alternative? There aren't many jobs in banks for them to go into," the hedge fund investor said. (Editing by David Cowell)