Hedge funds are finding out that flat is the new up this year

Beset by market volatility, crowded into similar strategies and in many cases bogged down by huge piles of investment capital, hedge funds are struggling this year, paving the way for poor results.

"It's hard to maximize returns and also maximize assets," Steve Cohen, the well-known former hedge fund manager who now runs Point 72, a multibillion dollar family office, said during a panel discussion Monday at the Milken Institute Global Conference.

Cohen's own fund fell 8 percent during a four-day period in February, then spent the ensuing months clawing its way back to zero — which is where it ended April, according to someone familiar with the matter.

"The business got crowded," Cohen added on Monday night's panel. "The strategies aren't that differentiated." (Someone familiar with the matter said that Cohen's fund got caught being long momentum stocks during a return to value. A firm spokesman declined, via e-mail, to provide the details of what went wrong.)

As a fund company challenged to eke out returns at the moment, Cohen isn't alone.

Third Point Offshore, the flagship fund run by the event-driven manager Dan Loeb, gained nearly two points in April, only to finish the month down a fraction of a percent year to date. Loeb wrote in a recent investor letter that the market environment so far this year has been "catastrophic" and that Third Point itself had wrongly predicted a weakening Chinese yuan and then missed a rally in cyclical U.S. stocks. He shares Cohen's sense of pessimism.

Cohen and Loeb's performances typify what's happening to large hedge fund managers right now, including brand names, say rivals and industry observers. "I'd be surprised if you find a lot of hedge funds up over 1 percent this month," said another stock fund manager in an interview last week.

Although monthly hedge fund composite numbers for April aren't yet available, the average fund was down 0.8 percent through March, according to the data vendor HFR, and April is widely expected not to be much better overall. Some managers, like the activist long-short manager Bill Ackman, whose Pershing Square Capital has fallen 18 percent so far this year, are down by even more.

Investors are taking note. During the first quarter of the year, they pulled more than $15 billion out of hedge funds in aggregate, the biggest move of its kind since 2009, according to HFR figures.

The New York City Employees Retirement System, a pension fund for city workers, recently voted to pull some $1.5 billion worth of hedge fund investments, citing lack of returns. And money managers from Steve Cohen to Christopher Ailman, the California State Teachers' Retirement System chief investment officer, who invests money in select hedge funds, say that the traditional fee structure of 2 percent of assets for expenses and a 20 percent cut of any upside returns is coming under fire.

"Two and twenty is dead," Ailman said in a television interview Monday. "People have to understand that. That model has been broken." Calstrs, he added, pays less than 2-and-20 to its hedge funds.

If the lackluster performances continue, industry observers say, more money will be pulled and funds will be shuttered.

"The industry has too many hedge funds," says Don Steinbrugge, managing partner of Agecroft Partners, a marketing and consulting firm for hedge funds in Richmond, Virginia. "A lot of the mistakes institutional investors are making [are], they're investing in brand." In that sense, Steinbrugge argues, the bigger and more successful a hedge fund gets, the more elusive returns can become.