“A sunny place for shady people” was how Somerset Maugham once described the French Riviera.

For many of the hedge fund managers gathered in the principality of Monaco this week, however, it is rather more gloomy than shady.

“The crisis has not even started,” said Jamil Baz, chief investment strategist at GLG Partners, part of the world’s second-largest hedge fund, the Man Group, on Tuesday.

“It will take 20 years for us to reach escape velocity,” he told a room of about 300 hedge fund traders and investors at a hotel in the Larvotto – attendees at one of the hedge fund industry’s biggest annual conferences: Gaim. “It will be devastating,”

Mr Baz’s pessimism was outdone by Niall Ferguson, the Harvard historian in vogue in financial circles. “Over-optimistic,” he said.

The real gripe causing concern among the fund managers of Connecticut and Mayfair though, is not merely predictions of greater financial woe for an ailing global economy.

Rather, the issue is that for two years, in spite of a great deal of prescient pessimism, an industry that prides itself on its investment savvy and charges accordingly has struggled to make any money at all. Indeed, if anything, hedge funds have struggled to keep it.

Since the beginning of 2010, the average manager has returned just 7 per cent, according to Hedge Fund Research. Equity-focused hedge fund managers have made a mere 3 per cent.

It is the longest stretch of disappointment the industry has ever suffered, and it is beginning to show.

“We start off with a big investment committee meeting every year and by the time it is finished we are all convinced it is going to be a year of alpha [a measure of hedge fund managers’ skill and outperformance],” says Mark Poole, chief investment officer of BlueBay Asset Management, one of the UK’s biggest bond investors and another Gaim attendee.

“It turns out to be just another year of beta [a measure of market risk].”

Top-flight firms such as the UK’s Lansdowne Partners have suffered significant losses on the stocks they hold, particularly banks, as they have been battered by the behaviour of markets in the unfolding eurozone debt crisis.

Lansdowne’s flagship equity long/short fund, which manages assets of $7bn, dropped 20 per cent in 2011 – a worse year for it than 2008 – and is up 5.23 per cent this year.

Other big names in hedge fund equity investing such as David Einhorn and Bill Ackman have languished because of the same problem.

Mr Einhorn’s Greenlight made 1.86 per cent last year and is up 3 per cent so far this year. Mr Ackman’s Pershing Square lost 2 per cent last year and is up 2.4 per cent so far this year.

Even big macro funds, which specialise in trading instruments such as bonds, interest rate derivatives and currencies, and are supposed to be positioned to take advantage of macroeconomic shocks, have failed to gain traction.

Moore Capital, one of the world’s best known macro funds, lost 2.2 per cent last year and is up just 2 per cent this year. Paul Tudor Jones’ Tudor BVI global fund, meanwhile, made 5 per cent last year but is flat this year.

The problem is easy enough to diagnose. What many hedge fund managers deem “RoRo” – or risk-on, risk-off – markets have pushed correlations high and eroded traders’ edge. All that is left is timing and few have proved good at that.

Shorting the euro, for example, has been one of the industry’s most popular trades since 2010. But while the single currency has weakened over the period, it has gyrated sharply. Hedge funds have been knocked out of trades by their own stop-losses.

Likewise, now profitable positions against Spanish and Italian bonds were tough to endure in the first quarter when the European Central Bank’s liquidity-boosting “LTRO” operation triggered a huge credit rally.

“You have to have a position, but the goal is to mitigate the negative carry on that position,” says Karlheinz Muhr, chief executive of the quantitative hedge fund QFS.

The same challenge continues to face managers. Few hedge funds now believe German Bunds are not due a correction after a flight to safety that has sent yields, which move inversely to prices, to historic lows, for example, and many – including John Paulson, the founder and head of New York-based fund Paulson – are positioned against them. But there are headwinds.

“Spain and Italy buying Bunds is a heck of a powerful force,” said Gavyn Davies, former Goldman Sachs economist and founder of hedge fund Fulcrum Asset Management.

One thing is certain: if their bets do not pay off in the coming months, hedge fund managers will have to answer some difficult questions.

“Patience in this industry is about two years,” says Jane Buchan, chief executive and founder of Paamco, a $16bn fund of hedge funds that has been investing in hedge funds for 12 years. “People won’t take a bonus one year and they’ll wear it as a badge of pride, but when it comes to a second year – no way.”

That second year is already nearing its close.

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