Hedge funds hardly ever had such a dreadful start to a year. Tougher times demand for lower costs – but not all agree about the need to reduce the fees.

«Difficult» and «challenging», two adjectives frequently used in connection with the first quarter of 2016 – not least in the hedge fund business. The three months through March have been the most difficult since the financial crisis. Money has been taken out of the funds for two consecutive quarters for the first time in six years.

The benchmark index for the industry declined 0.67 percent in the first quarter, according to Hedge Fund Research (HFR), a U.S.-based company specialized in the indexation and analysis of hedge funds.

Doom and Gloom

Some of the best-known funds fared the worst. John Paulson, who aims to earn money with companies in exceptional circumstances, had a book loss of 15 percent. The Pure Alpha funds of Ray Dalios declined 6.7 percent.

Bill Ackman's customers fared even worse. His Pershing Square Capital Management Fund dropped 25.6 percent of its value. Ackman's strategy is to generate a profit by getting involved in the management of the companies, in which the fund holds stakes.

So far, 2016 looks likely to leave behind some gloomy faces in the industry, which claims to make profits even in the darkest of moments because of the superior talents at work. Great talents cost big bucks – and big bucks in connection with extensive losses means angry investors.

Shortcomings Acknowledged

Man FRM, one of the better known funds, has acknowledged some of the shortcomings. The «2 plus 20 percent» fees were one of main problems of the industry, «Institutional Money» reported, citing a study by Man FRM.

The funds were under pressure to develop a business model with a cost structure that would prove sustainable to customers and managers, according to the report. A change of heart at hedge funds was inevitable, Man FRM suggested. The fund is managing $12 billion.

Another of the U.S. heavyweights, BlueCrest Capital, is also evaluating its position. Michael Platt, the co-founder of the fund, last year took $260 million in compensation – his customers meanwhile suffered a loss of 0.63 percent. The company, which manages $37 billion, is now ready to alter its fee policy, according to «FAZ» newspaper.

Not Worth the Money

Warren Buffett recently said that hedge funds weren't worth their hefty fees – a criticism that seems to have been born out by the facts.

Not all are unhappy though: UBS said that high fees were necessary to attract and finance the top talents from Wall Street. When and by how much Man FRM and BlueCrest will adjust their pricing model, is yet to be seen – and they are currently in a minority of two.